By: Michael White

As 2021 begins to draw to a close, there are several key takeaways from mergers and acquisitions (M&A) activity that are informative for business owners and entrepreneurs as they begin their planning cycle for 2022. 

M&A activity in 2021 is at all-time highs across industries.  According to Dealogic, companies have announced transactions worth more than $1.8 trillion in the U.S. and more than $3.6 trillion globally through August 2021. Based on the activity that we have been seeing across sectors, we expect both the dollar amount and the number of deals to exceed the previous records set in 2015. The fourth quarter of 2021 will likely be the busiest single quarter for M&A in history as many business owners and advisors work to complete transactions ahead of any potential changes in capital gains taxes.

The robust pre-pandemic deal environment was largely driven by demographic shifts, such as Baby Boomer owners entering retirement, and demand for high-quality businesses from private equity and strategic buyers. Disruptions associated with COVID-19 may have caused delays in many transactions, but the positive fundamentals that are driving the market remain. The threat of an increase in the capital gains tax rate spurred many owners to consider their options and pursue an exit this year.  Although the final rules are not yet implemented, it appears as if the increase in capital gains tax rate will settle out at a more modest level than originally anticipated.  This is great news for business owners, as it will give them the time to properly assess an exit strategy or implement a succession plan.

The deal environment is expected to remain robust in 2022 and will be driven by the following factors:

• Certainty as it relates to changes in the capital gains tax rate
• Continued low interest rates and ongoing government stimulus
• Belief that the worst may be behind us as it relates to the pandemic
• Pent-up supply and demand from both sellers and buyers
• Record levels of dry powder from private and public markets, including SPACs and private equity

Both corporate and private equity buyers will continue to utilize M&A to transform and drive growth as the economy recovers, with value being placed on digital, technology-enabled, and disruptive businesses that are well-positioned in the post-COVID-19 world. Other acquisitions will be driven by the desire to improve access to healthcare and scale existing platforms, while reducing costs and creating long-term strategic and operational improvements. The fact remains that there will be continued demand for high quality, innovative companies across healthcare sectors over the next 12-18 months.

Private equity has become an increasingly important part of the lower middle market over the last ten years and this buyer class now accounts for over one third of all transactions.  Private equity can be a value creating partner by providing strategic guidance along with capital.  Private equity investors are seeking investments that can generate value accretion over time through a combination of both organic and acquisitive growth. 

If you are active in the M&A market or considering a sale of your business, it is critical to understand how private equity works and their value proposition, as this will influence your deal and the options that are available to you as an owner. The Founders Advisors team is well versed in helping owners understand the qualities private equity investors are looking for in a business and how your business is valued by investors.

If you have questions about the value of your business in a potential sale or recapitalization transaction, please reach out to any member of our team.  We would be happy to have a conversation with you about potentially maximizing that value, whether for today or for the future.