At the beginning of 2022, the deal environment had changed in such a way that it altered Heritage Holding's approach to selling, says Managing Partner Alex de Pfyffer.

"At Heritage, we have the benefit of having a very long-term investment style — we have no timeline on our capital, so we could, in theory, hold businesses forever," he says. "But the current market has essentially pushed us to sell companies way earlier than we were thinking."

He says the firm had sold one of its platforms in late 2021, and done so before the 10-year plan they had with the company could be seen all the way through.

"But the market has become so powerful that we had to entertain unsolicited offers for a couple of our platforms, and we sold two in the last couple of months," he says. "That's been the biggest impact for us is just a change of strategy and actually change our strategy in terms of favoring sales where we wouldn't have otherwise."

In communicating back to funders that change in strategy, he says it was always pretty well understood that the capital structure was put in place so that the firm could be opportunistic in terms of when the right time horizon not to sell, but they hadn't expected the opposite.

"We always thought, Fine, if we have 10-plus years to hold the company, we won't be forced to sell in the middle of a great recession," he says. "We actually didn't think about it the other way around — we'll actually be forced to sell when the market is the hottest it's ever been."

Because of the conditions, he says it wasn't that hard to convince stakeholders of the need to move because they see it as well.

"They own operating businesses, too," he says. "They're getting hit up every day by potential buyers and they see the strength of the capital markets. It's supply and demand. You've got more money than ever chasing roughly the same amount of companies."

IMB Partners CEO Tarrus Richardson says the U.S. is 10 years into a bull market and the tendency has been to underwrite with an assumption that the market's going to continue to be either flat or up. The pandemic was a surprise — a model that no one would have ever run — and that has tested some industries. But, speaking at the beginning of the year, he sees that in the next five years there's more likely a chance of a downturn than a continued run up.

"I don't think people are modeling that tremendously," he says.

For firms, he says it's a matter of figuring out how to structure for safety and getting the industry insight needed to have intentionality with what you'll do post-close because when that downturn comes, there are companies that won't survive.

"We're in a market where everybody, most of the associates and analysts and vice presidents and principals that are doing these models, have never seen a downturn," he says. "It's crazy."

de Pfyffer and Richardson spoke at the Boston Smart Business Dealmakers Conference about buyers' and sellers' reaction to the changing M&A market. Hit play to catch the full discussion.