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The recent year has been fraught with upheaval for the M&A markets and the economy at large. A number of factors, including geopolitical uncertainty (e.g., the war in Ukraine, contentious elections, U.S.-China tensions, etc.), economic difficulties (such as inflation and rising interest rates), continued strain on supply chains, and the difficulties of maintaining a strong workforce, have had an effect on markets generally. The public markets have also been volatile, with the S&P 500 opening the year at a record high before falling by roughly 15% through November. The middle market’s performance has also been highly volatile as companies try to adapt to the shifting economy.

Strategic and financial purchasers can take advantage of the uncertainty to capture the value of a company through M&A, but they also face risks as a result.

As the available pool of excellent acquisitions has reduced in relation to the amount of capital wanting to be invested, buyers are more interested in well-performing enterprises.

However, there is still a “flight to quality” for the acquisition of companies and management teams who have demonstrated consistent revenue streams, healthy profit margins, and low levels of cyclicality over the past year. Yet, private equity purchasers still have access to a large pool of liquidity in the form of “dry powder,” or uninvested cash, which will be deployed strategically at valuation levels consistent with the present economic forecast.

Sellers will face difficulties in 2023 navigating a buyer’s market as we move further away from the extraordinary M&A activity and valuations observed over the past 24 months. Sellers might anticipate lower valuation multiples as a result of a more selective buyer process, with the exception of luxury enterprises and businesses in a growing industry. In spite of the fact that it may take some time for this to be accepted, a meeting of the minds between buyers and sellers is expected to occur sometime in the first half of 2023. So, sellers can choose to either accept lower valuations (often when a transaction is absolutely necessary) or wait for a better opportunity to present itself in the future.

We expect the M&A markets to be resilient and continue to be active, albeit at reduced levels, far into 2023, despite the many market concerns that will persist. We still anticipate robust M&A activity in 2023, at least until there is a substantial liquidity gap in the markets if and when strategic cash and private equity dry power falls to historically lower levels. Yet, from a valuation standpoint, we anticipate that values will continue to level out, but not substantially. We anticipate that 2023 will be another year of great change, full of both difficulties and opportunity.

Be flexible and open to new ideas and experiences. If you want your businesses to succeed, you need to use technology and data to make educated decisions. Contact Credo CFO for your business valuation needs.