As the pandemic has evolved, so have its positive and negative effects on business. One of the most interesting and perhaps surprising impacts has been on mergers and acquisitions—an area that has experienced a boom even as many sectors have struggled to survive and rebuild.
The numbers are certainly impressive: According to Big Four accounting organization KPMG, M&A transactions in the United States totaled $2.9 trillion in 2021—up from $1.9 trillion in 2020. What’s more, deal valuations also rose to new heights in 2021, with eight out of 10 executives surveyed by KPMG saying they expect deal valuations in their industries to rise even more in 2022.1
That may make it a more appealing time than ever to enact your business’s exit strategy. (More on that later.) But it’s also, for many reasons, a good time for growing companies to expand their M&A horizons.
Exploring what’s possible right now
Many companies have access to record amounts of capital right now, interest rates remain relatively low, and executives everywhere are feeling pressure from investors to raise their own business’s valuations. All of this is inspiring Truist clients to be open to deeper conversations about M&A, says Scott Cathcart, head of corporate finance for Truist Securities.
“It’s been enjoyable for us to talk to our clients about what their M&A options are— ‘the art of the possible,’ if you will,” he says.
Here are a few examples of the ways Cathcart has been seeing companies solve for pandemic-related challenges by exploring “the art of the possible” in terms of M&A.
A solution for labor shortages
Today’s corporations are finding that talent acquisition can be a fringe benefit of a well-conceived M&A deal. “[In the corporate world,] everybody’s got 12% to 15% shortfalls in labor,” says Cathcart. “A big synergy from M&A now is talent acquisition that gets the combined business closer to full staffing.”
Cathcart is quick to point out that labor shouldn’t be the biggest motivator for buying another business.
“An acquisition first has to make strategic sense from a corporate finance perspective,” he says. “But I think this is the first time I’ve seen labor being not the number-one or number-two reason to do a deal, but maybe the number-three or number-four reason.”
A rebuild-and-recover strategy
As an example of this, Cathcart offers up the auto dealership clients of Truist.
“If you’ve got understaffed Dealership A buying understaffed Dealership B, you can solve some labor issues from an administrative perspective,” he says. “And revenue is likely impacted because of that.”
Not enough staff in the accounting office, for example, can impact the timing of accounts payable and accounts receivable transactions, which can affect cash flow. Delays in paperwork can cause other setbacks, like acquiring more vehicles or getting purchased cars into the hands of consumers more quickly. (Another way to streamline some of these processes is to digitize core financial processes, which may enable companies to get by with fewer people in their back offices.)
In other cases, companies looking to expand may consider looking to private equity investors, who have recently begun outbidding corporate buyers. This can bring with it a slew of additional benefits, particularly for smaller companies, which may benefit from PE-related networking and business know-how, along with the influx of capital.
An answer to supply chain disruption
Joe Goode, Beverage Industry manager for Truist Commercial, sees M&A as an opportunity for some clients to expand into other channels.
“For example, some beer, wine, and other alcohol distributors are using M&A to diversify to replace revenue they lost when on-premises sales were suspended,” says Goode.
In other cases, he has seen product providers purchasing their own distribution channels, so they can better control the supply chain.
“The stars have aligned to support a big exit in the distribution space,” he says.
If you’re the one controlling whether the trucks that carry your goods have a driver, at least you’ll be better able to foresee potential problems, alert your buyers, and possibly find a way to pivot, even if that means shifting some of your workers into driver roles.
An exit strategy for private owners
Some owners are taking advantage of the active M&A environment (and high valuations) to exit their businesses sooner than they might have written into their pre-pandemic business plan.
“It has been a really hard couple of years for many businesses, and for some, the impacts of the pandemic are still ongoing,” says Michael Stollmack, managing director of food and beverage investment banking at Truist Securities.
“Some of these owners are deciding to exit their businesses maybe faster than they would have before, assuming their company’s performance can support a sale process,” he adds. “For some, the continued effects of the pandemic are too onerous.”
Stollmack believes this and other factors will continue to drive strong M&A activity for the next 12 to 18 months.
An inspiration for transition planning
Whether or not an owner or majority shareholder is looking to exit soon, the advice is the same: Get your transition plan in order ASAP.
A good starting point is to obtain a current business valuation. The business purchase timeline has accelerated drastically, which makes it important to have a good idea of the value of your business before you find yourself weighing an offer.
With so much capital being infused into the markets, it pays to be prepared for unsolicited inquiries, even if you’re not currently entertaining offers.
In the meantime, focus on building a culture of continuous improvement and business growth. By keeping a future transaction in mind—and being prepared for it—you’ll be ready to act fast when the time is right. [Read the Truist Purple Papersm to learn more about the importance of business transition planning.]
Hindsight may be 2020, but foresight is very 2022
When Cathcart talks to business owners and executives about the active state of the current M&A market, he says many are surprised.
“Some of them tell me they wish they had known this a year ago when they chose not to pursue an acquisition,” he says. “If they had, they might have been more aggressive.”
For this reason, Cathcart advises owners to think about “the art of the possible” when it comes to mergers and acquisitions—and talk with their relationship manager about what those possibilities might be.