Mar 1, 2023

M&A Report - Year End 2022

The honeymoon phase is over

After a record-setting year for M&A activity in 2021, it would have been challenging to maintain dealmaking momentum at such a pace even in the most auspicious of circumstances. As it turned out, 2022 provided a much less supportive backdrop for M&A transactions. Feeling the pressure from the fastest tightening cycle in 40 years, the volume of M&A activity in the US declined 19.5% year-over-year. Even though the market conditions for dealmaking have become more challenging, the market is showing resilience and the overall sentiment remains optimistic.

Heading into 2023, we are burdened with considerable uncertainty, which continues to take its toll on the public markets. Private market M&A is, like the public markets, impacted by rising rates, hyperinflation, supply chain issues, labor shortages, and ongoing geopolitical uncertainty. However, it continues to benefit from the (still) abundant dry powder and buying power from private equity firms and large corporate entities.

Lower middle market perspective

M&A dealmakers always find new opportunities in a changing environment. 2022 signaled a downshift from mega deals to smaller deals, which are considered easier to integrate, trade at significantly lower EBITDA multiples, and are easier to finance. The focus, from the buyer's perspective, is switching to add-on acquisitions (typically in the lower middle market), growth equity and fractional ownership acquisitions (in the middle market). The 24.9% drop in the S&P 500 is validating the downward pressure on multiples, which are slowly settling in as a new reality for sellers looking for an exit. Buyers always adjust quicker than sellers to market conditions, but they eventually meet to form an equilibrium. We expect transaction volume in the lower middle market to come down further from 2022 (15-20%), alongside a moderate fall in valuations (10-15%). Buyers will also be pickier, targeting:

• Long-term sustainability through higher minimum EBITDA requirements (> $1.5M), strict minimum EBITDA margins (> 10%), and more predictable recurring cash flow;

• Leadership with experience navigating through changing market conditions;

• Low revenue concentration risk;

• Lower valuation multiples based on the increased weighted average cost of capital (WACC).

What will drive successful deals?

Realistic seller's expectations
Portfolio renewal: review, divestiture, and reinvestment
Capital discipline: deleveraging and improving EBITDA margins
Experience and discipline in navigating uncertainty
Speed to unlocking value from transformational deals
Creating alpha through tact and operational skills

How can Pacifica Advisors help you?

The path to consummating a merger or acquisition transaction is complex. Whether you are seeking a growth equity partner, a long-term lending relationship, or a right-out sale, Pacifica Advisors (“PA”) has the operational and transactional expertise to add significant value to that process. As M&A advisors in the lower middle market, we specialize in serving companies with EBITDA ranging from $1.5 to $15 million. Our team of professionals will review your financials, assess your competitive advantages, benchmark your company’s performance, and identify growth opportunities to enhance marketability. We are committed to assisting you throughout the entire process, from valuing your company, creating an offering memorandum, marketing your business to suitable buyers, negotiating offers, structuring the deal, conducting due diligence, and closing the transaction.

We are excited to announce that Pacifica Advisors has again been recognized in the Top 25 Investment Bank according to the Axial’s Lower Middle Market Investment Banking League Tables (out of 930 advisory firms). We are launching many new deals for the last 2 quarters of 2022, and so we expect to climb back to the Top 10 rankings.

Featured Partner

Erik Grunwald - SBA Business Development Officer