M&A Market Could Pivot in 2019

By any account, 2018 was a good year for M&A, continuing one of the longest seller markets in modern history. We expect that momentum to carry well into 2019.
Deal activity is being driven by a number of factors, including record amounts of dry powder, a positive lending environment, and interest rates that, while rising, remain at historic lows. Low unemployment is another contributor as companies look to grow through acquisition when talent shortages make it harder to grow organically.
Yet, dealmakers do not expect the trend to last too much longer. Most advisors (83%) in the Main Street and lower middle markets say the strong M&A market won’t last more than two years. But nearly a third (32%), say the current market will be over within a year, according to the fourth quarter M&A Market Pulse report sponsored by IBBA, M&A Source, and the Pepperdine Private Capital Markets Project.
Fears of a coming recession have been rising for some time. Depending on which report you read, some economists suggest we’ll see a slowdown this year but won’t hit a true recession until 2020. Others say a recession might arrive in the second half of this year.
Looking back on our past three recessions, I think it’s worth noting that the next one (when it comes) will be the only one with real, significant warning. For most of the general business community, the dot-com bust, post-9/11, and the housing bust all came as a relative surprise.
In recent recessions, the market shifted before most business owners could react. Businesses that were worth a certain value one month suddenly saw their valuations drop due to factors entirely outside the owners’ control.
Today we’re hearing from business owners who want to exit now, before the next recession hits. Most of these business owners weathered the last downturn (or three), and don’t want to do it again.
Demographic trends are another market factor. Many business owners in the Baby Boomer generation are finally getting ready to sell. They’re starting to enter the market at a faster pace and, eventually, that could create some downward pressure on valuations.
But for now, advisors say the lower middle market, which includes businesses valued from $2 million to $50 million, is solidly a seller’s market. More than 80 percent of advisors say lower middle market sellers have the advantage.
Even Main Street, which is traditionally more of a buyer’s market has tipped toward sellers. Only the smallest market sector, with businesses valued at less than $500,000, still favors buyers.
All in all, M&A conditions are good. If you’re thinking about selling in the next three years, you probably want to go now, before conditions shift. But if you have five or more years in the tank, you could probably hold out for the next market cycle.