High Demand for Sellers Drives Valuations Up

The Law of Supply and Demand is one of our most core economic concepts. It explains that all else being equal, the price of a good tends to increase when the supply of that good decreases (making it rarer), or when the demand for that good increases (making the good more sought after). Over the last year and a half, we’ve witnessed this in middle-market mergers and acquisitions. The middle market is traditionally defined as deals valued less than $250 million in enterprise value.

Demand for deals has increased

In Spring 2020, we watched a lot of M&A activity slow or stop. Deals stalled while meetings were delayed. Buyers who would normally be visiting businesses before a sale stayed home. Happily, we’re past that now. By the time this post publishes, roughly half of all Americans will be vaccinated and able to travel and work more safely. We are past the presidential election cycle and the uncertainty it causes. Many buyers, who have been holding on to their money for almost a full year, are actively looking for new opportunities. In M&A jargon, you will often see this referred to as buyers having “dry powder” ready to spend. We already see this in play, as buyer activity increased in the second half of 2020. By the end of last year, it was estimated that private equity firms alone were sitting on a record $2.9 trillion of available capital.

“Companies are more comfortable allocating capital now than earlier in the pandemic. M&A remains one of the most attractive ways for them to achieve growth, making 2021 another potentially busy year.”
Brian Healy, Co-Head of Americas M&A, Morgan Stanley

Between dry powder, a historically low cost of capital, and impending tax law changes, buyers are ready to spend.

Supply of sellers is still low

Despite this high demand, we’re still seeing a lower supply of sellers in the middle market M&A space. Many business owners sat tight through the end of 2020, waiting to see how the election and global pandemic would play out. As a result, fewer prepared to sell, moved forward with their existing exit strategies, or explored new opportunities.

We know sellers are out there. The Exit Planning Institute estimates that more than 8 million private businesses in the United States will be sold or exited in the next 12 to 15 years, due to Baby Boomer retirement and other factors. We also know that many business owners will be eager to cash out before taxes change, potentially in early to mid-2022.

The key is that we’re not seeing that flood of supply hit the market – yet. The demand is there, but the supply hasn’t met it.

Demand is causing valuations to rise

The law of supply and demand tells us that if demand is high for a small supply, prices will rise. That is precisely where we are. Buyers are actively looking for great opportunities across a limited supply of sellers. Those sellers who are ready to talk are achieving impressive valuations, and if they move now, will be able to close deals before Biden’s tax policies potentially come into play, maximizing their profit.

Now is the time. As we move through 2021 and valuations rise, basic economic theory tells us that more and more sellers will jump in the pool. If you are considering selling your business, please contact us for a confidential discussion of possibilities appropriate to your specific situation. We can help you position your business for maximum proceeds.

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