• The U.S. Economy (Real GDP, annualized) decreased an estimated 1.5% in the first quarter of 2022, led by decreases in private inventory investment and exports and partly offset by increased spending by consumers.
 
  • The Unemployment Rate has held at 3.6% since March, though has declined 30 basis points since December. At 3.6%, the unemployment rate is only 10 basis points above its pre-pandemic lows. The labor force participation rate has remained relatively stable since the start of the year, reading 62.3% in May.
 
  • Consumer sentiment fell to 50.2 in June, a decline of more than 20 points since December. Consumers across a broad demographic base continue to cite inflation as a leading cause of their declining sentiment. Additionally, consumers’ negative outlook on business conditions over the next year contributed meaningfully to the decline.
 
  • Manufacturing PMI, posting 57.0 in May, signaled continued growth in the manufacturing sector. However, growth in May was the slowest in four months as demand slowed. Longer lead times, material and capacity shortages, and rising input costs continued to drive increased selling prices.
 
  • Services PMI indicated another month of expansion in May, albeit the slowest rate of growth in four months. Like the manufacturing sector, the services sector experienced slowing demand along with rising input costs.
 
  • The Small Business Optimism Index declined to 93.1 in May, the fifth consecutive month below the 48-year average of 98. 28% of small business owners cited inflation as their single most important problem. Even as small business owners have increased wages to attract workers, finding employees has remained difficult. 92% of owners who needed to fill positions reported that they had few or no qualified applicants.
 
  • Despite improved revenue expectations, the first quarter CFO survey reported a continued decline in CFO optimism. The decline was driven by rising concern with cost pressures, supply chains, and availability of labor. Declines in optimism were largest for firms with fewer than 500 employees which indicates the economy’s unique impact on smaller businesses that are more affected by cost pressures and low labor participation.
  • Deal volume slowed in the first quarter of 2022. The reduction in deal volume may not come as a surprise considering the record pace of deal volume in 2021. It’s possible the economic uncertainty attributed to geopolitical risks in Europe, surges in commodity prices, and continuing supply chain constraints contributed to the slowdown.

  • Valuation multiples declined slightly from the fourth quarter of 2021 to 7.3x, though they remain in line with the full year of 2021. While multiples across each enterprise value subset either increased or held flat with the fourth quarter, the decline is due to an increase in the ratio of completed deals in the sub-$50 million enterprise value range.
  • Total leverage declined slightly to 3.9x in the first quarter of 2022. Although leverage on deals between $25mm - $100mm increased slightly, the increase was offset by a significant reduction in leverage, despite higher valuations, for deals between $10mm - $25mm. This could be an indication that lenders are perceiving smaller businesses as riskier in an uncertain economic environment.

  • Deals between $25mm - $50mm saw a slight uptick in leverage for the quarter while valuation multiples remained steady with historical periods.

  • Valuation multiples for deals between $50mm - $100mm have continued their trend upward, supported by an increase in leverage.

  • In the first quarter, the LIBOR rate increased 30 bps to 0.5%. However, the FOMC hiked interest rates two times in the second quarter, raising the fed funds rate target 25 bps and 75 bps in May and June, respectively. To combat inflation, the FOMC expects to increase rates another 175-200 bps throughout the remainder of 2022.

  • Senior debt LIBOR spread decreased to 3.9% in the first quarter. Meanwhile, subordinated debt pricing increased to 11.3%.

Whether you want to sell or buy a business, Chapman Associates provides a personalized service, based upon our sixty-two years of successful M&A closings and our relationships with more than 9,300 registered buyers. Chapman is one of the most respected middle-market M&A firms in the country. What makes Chapman different from the competition?

• We make a market for our clients.
• We do not charge any up-front fees.
• Our fees are based on successfully completed transactions.
• We devote senior-level attention to every M&A transaction.
• We do not delegate work to junior staff.
• We help clients set realistic goals and then work hard to exceed them.
• We conduct in-depth research and rigorous analysis.
• We prepare all necessary offering materials.
• We have seventeen offices nationwide to serve our clients.
Mark Mroczkowski, CPA, CM&AA
Managing Director
mark@chapman-usa.com
407.580.5317