Yeah, But — How Does This Affect Me?

The macroeconomic trends that affect the big dealmakers don’t always affect opportunities for small to middle-market businesses. Even so, instability and uncertainty in the economy influence the psychology of both business buyers and sellers.

The Big Picture View

According to an Eversheds Sutherland survey conducted in January 2022, 7 in 10 business leaders expected their appetite for acquisitions to increase this year. Since then, the outlook has shifted. A smaller survey in April 2022 showed that almost all organizations with an appetite for acquisitions said they were postponing at least some M&A activity.

Reasons cited for the less optimistic outlook included: the fall in global economic confidence, increasing commodity prices, share price volatility reducing available capital, and direct and indirect impacts of economic sanctions on Russia for the war in Ukraine.

Supply chain issues and labor shortages add to the uneasiness about current business conditions. The value of an acquisition can be impacted substantially if key personnel leave the organization.

The Eversheds Sutherland survey found that “Over two-thirds (67%) of business leaders have concerns about talent retention, making M&A a riskier investment.”

In the April 2022 survey, business leaders reported that timelines were slipping, deal volumes were decreasing, and deal making has become more complex.

“Despite this turbulent landscape, business leaders still recognize that M&A offers a fast-track solution to unlocking strategic value,” wrote the Eversheds Sutherlands analysts. “Under pressure to adapt to a post-pandemic world, organizations must make staff retention, digital transformation and supply chain resilience top priorities. This M&A triarchy of talent, tech and trade is currently driving strategic M&A deals.”

The Way I See It

Here are a few trends that I have observed.

Label and specialty converting businesses haven’t fallen out of favor with buyers. All types of buyers are interested in our sector. Private equity and large buyers are eager to access new markets and expand geographic strengths. For smaller sellers, strategic buyers appear to be willing to put money into the game and be patient for results.

But private sellers who are eager to sell quickly and move on with their lives should be aware that the seller’s market of 2019 has become a buyer’s market in 2022. A buyer that once may have offered a multiple of 6 is now offering a multiple of 4.

Buyers who previously factored pre-COVID numbers into their EBITDA calculations now scrutinize 2021 numbers to determine how much of a post-COVID “bounce” came from actual growth and how much was due to the forgiveness of the PPP loan the seller received.

Uncertainties are likely to affect all companies for the next 24 months. The post-COVID economic rebound that started to take off at the end of 2021 has been short-circuited by the economic policies of the current administration. No matter how big or small your business is, you should be prepared to deal with inflation, recessions, material and labor issues for the next two years.

Can you spend the next two years staying afloat in these turbulent times and still achieve a record of growth over the full five years?

If you are disappointed by the size of the offer you receive for your business, remember that the buyer is facing a lot of risk too.

When you decline an offer thinking you will grow your business over the next five years, it raises the question: “Why haven’t you been growing the business over the past five years?”

Post-sale integration will be critical. Building a strong culture to maintain key talent and attract new employees will influence the types of buyers you can attract. If the deal closes, you may have to stay involved with the business for longer than you might have originally envisioned. The alignment of work cultures after the sale will be more important than ever.

Our Advice

Weigh the pros and cons of selling now vs. trying to grow or hold steady. Whether you feel comfortable with the state of the economy or not, you can’t afford to stop moving. Anticipate obstacles and think about ways to work around them. For example —

  • What steps are you taking to recruit and retain top talent?
  • Have you been able to mitigate the effects of supply-chain disruptions?
  • Are you advancing the digital transformation of your business?
  • Have you received an independent valuation of your business?

Plan for death. Take nothing for granted. Think through all of the potential scenarios that might affect your plans for the rest of your life and the life of your business. For example:

  • What if my business tanks before I can sell?
  • What if I get so sick I can’t run the business?
  • What if my spouse divorces me?
  • What if my business partner wants out before we can get things market-worthy?
  • What if my kids decide to buy the business… and they fail?
  • What if I die?

At LaManna Consulting Group, we help business owners think through those possibilities and create a master plan. We also provide a 6-month task list that addresses each contingencies and incorporates milestones for measuring progress. Call me at 561-543-2323 and I will tell you more.

To learn more about what buyers look for, download our white paper, Acquisition Criteria for Printing Companies.

RECOMMEND READING

Eversheds Sutherland, Putting the pieces into place: The next drivers of strategic M&A