Following a record-breaking year in 2021, this year's M&A market, while still strong, is facing market headwinds.

"What we're seeing now, since there's clearly more uncertainty in the next 12 to 24 months — economically, globally — buyers are becoming more risk-averse than we've seen them in a couple of years," says TKO Miller LLC Managing Director Joe Froehlich. "So, anything that's scary in a business is amplified dramatically."

Speaking at the recent Milwaukee Smart Business Dealmakers Conference, Froehlich, who was joined by Web Finance Direct CEO Miller Newton for the kickoff session titled, "What’s Over the Horizon? Evaluating the current deal market and looking ahead," moderated by Husch Blackwell’s Chief Executive Paul Eberle, the group offered insight on what they are seeing in the marketplace and how changing market conditions may impact deal flow and structures.

Buyers, Froehlich says, are looking for more predictability and less cyclicality, and they're looking for business with recurring revenue that are more recession resistant. They're also looking closely at a company's supply chain in light of the significant disruption that has occurred over the past couple years.

"Buyers are reacting like there is going to be a recession," he says. "So, they're taking that very much into account as they look at businesses."

When it comes to the private equity buyers that he's talked with, Froehlich says they're as risk averse as he's seen them in many years. They're not generally willing to gamble on high-risk, high-return opportunities. Instead, there's more of a flight to predictability and certainty.

Speaking to the sell-side, Web Finance's Newton similarly sees more of an appetite for quality companies, strategic acquisitions, strategic transactions with companies that have strong balance sheets — a move back to the fundamentals. He's also seeing a tendency toward deals in which the two parties have a higher degree of familiarity.

"I believe that the best acquisitions or transactions are actually done with business partners," Newton says. "Really focus on your strategic partners today if you're looking for a transaction in the next two or three years, whether that's customer acquisition or distribution, products. A lot of the best valuations in acquisitions tend to come from companies you're partnering with currently."

Froehlich emphasizes that companies considering a sale will want to have strong distribution channels, as comprehensive and complete of a management team as can be presented, as well as systems that will provide good information.

"Because one of the things that's happening as a result of the really high prices we've seen in the M&A world over the last several years is due diligence is taking longer, it's more in depth, it's broader," he says. "Having the information available to respond to diligence allows you to keep up with a buyer and present a face of the company that justifies the kind of price that's been talked about."

One thing to consider that might make a business more attractive to buyers it to try to highlight the ways in which the company is like a SaaS business, which has sticky customers, recurring revenue and predictability.

"Those are the things that lead to high multiples," Froehlich says. "So, the more you can make your business look like that and embrace or embody some of those characteristics, the better result you're going to get when you go to market."