Dealmakers hit headwinds at the end of last year as inflation, labor and supply side issues, rising interest rates and the threat of recession put a damper on deal activity and volume.
Aon Managing Director Vipul Patel said during the Minneapolis Smart Business Dealmakers Conference that the deal market was in the midst of making a flip.
"I think the sellers' mindset is still, this is a seller's market," Patel says. "They haven't adjusted what their expectations are around multiples and valuation yet. But the buyers have, especially the private equity buyers that now have to finance deal to the higher rate."
Because of that, he says deals are taking longer to get done because of that disconnect in valuation. They're also being structured a little differently, with more contingent consideration than before. And while more private equity firms are walking away from deals that are too expensive, strategic acquirers aren't following suit as they tend to be able to pay more because they're going to extract synergies and they don't have the financing costs that private equity firms do.
Wealth Enhancement Group Chief Investments and Business Development Officer Jim Cahn says it's become a more of a buyer-friendly market ...
"But the sellers don't know that yet," he says. "And so they're about to find out."
He says while there's still a rush of people to the exit, it's taking a lot longer to get the deals done.
"What we're seeing is as markets fall and as the interest rates rise and multiples start to change, we're having a lot of success renegotiating deals," Cahn says. "We hadn't really renegotiated a deal until about six months ago. And in our business, the revenue is so dependent on the market that the value is just not there and we can't pay for value that's not there. I've been surprised at our success and being able to push sellers both on terms but also on price as markets have changed."
He expects the private markets to start to see meaningful multiple compression around the second quarter of this year, which he says means for those who haven't sold their business, it's likely too late to take advantage of the record high multiples that people were seeing in the first half of 2022 and in late 2021.
Norwest Equity Partners Managing Director Adam Garcia Eveloff says the pendulum has swung more in favor of the buyer than of the seller recently. It's no longer a time when people are rushing to buy companies, speeding through processes and paying high prices just to have the opportunity to invest in a company.
That's being translated into valuations, and regardless of the company type or who's backing it, it's also translating into patience.
"Their alternative that we always face is to wait," Garcia Eveloff says. "One of the places we really see this changing dynamic show up is the number of deals coming to market and the number of opportunities. If you're a really high-quality business, you have a chance to get probably not the valuation you would have gotten a year ago but close to it because there's scarcity in terms of the number of assets out there that investors like us are available to invest. We see a lot of business owners of all shapes and sizes who own high-quality businesses who don't have some exogenous factor driving their timing just choosing to wait, continue to execute and operate knowing that a pendulum, by definition, is going to swing in one direction and come back in another direction and they'll take their time."
So, pricing has come down, largely asset by asset with some impact depending on the category and its macro exposure or recessionary risk. And for buyers who want or need to leverage debt capital to finance deals, it may not be available at the level it had been. That, he says, is going to impact valuations.
"That's the other place we're seeing this price swing and market dynamic shift, where lenders of all types are becoming more conservative, even to the degree to which they're, for all intents and purposes, sort of closed. And so that is impacting our activity and valuations.
NJK Holding Corporation Florida CFO Rhonda Donahoe says what she sees on the horizon is — more with the technology-type companies her firm deals with — is that dealmaking is going to be tougher.
"Especially when you hear of all the losses, all the hits technologies are taking," Donahoe says. "We're definitely going to have a harder time. But we can sit and wait for the right deal or the right partner."