|
Over the past seven years, private businesses owned by founders have emerged as the primary source for mergers and acquisitions (M&A). In the last two years, there has been a significant increase in the number of M&A deals involving private businesses, pointing to a growing trend in the market.
In the first quarter of 2023, M&A deals involving founder-owned companies as targets represented 61.5%, an increase from 53.8% in the last quarter of 2020.
A recent Pitchbook report noted that the two main factors that have caused this rise include:
A shrinking supply of other seller types - Who is selling with so many potential sellers on the sidelines or lining up to buy? The answer, almost by process of elimination, is the non-backed, private business owner.
Intense add-on activity by PE-backed platform companies - Market headwinds has caused acquirers to move down the market, given the financing troubles with larger deal sizes.
While interest rates remain elevated, sponsors and corporate buyers are likely to continue investing in smaller, non-backed companies on an add-on or bolt-on basis as long as they are conducive to earnings growth, and financing for large platforms or strategic acquisitions remains scarce.
Why is there a struggle to find sellers?
For the most part, the exit market has dried up due to the dislocation in valuation expectations between buyers and sellers. Sellers are still expecting valuations based on a post-covid market environment; meanwhile, given the macroeconomic headwinds, rising rates, and numerous other factors, buyers cannot underwrite such expectations.
Continuing to hold is especially true in sponsor-backed portfolio companies, as firms would instead keep assets until better liquidity options return. Sponsor-backed M&A exits declined in value by 39.9% and deal count by 20.1% in 2022- and continue to fall throughout this year.
How does Chapman Associates think through this?
Buyers tend to prioritize deals whereby founders look to retain some equity in their companies post-transaction. Not only does this strengthen alignment between the buyer and the founder, but it can help bridge valuation differences where sellers can continue receiving value + equity appreciation on the “2nd bite of the apple” during the investment period and the next exit.
This trend highlights the increasing importance of private businesses in the M&A landscape and underscores the need for business owners to understand the dynamics of this market. Our experts can help guide you through this complex process and ensure a successful outcome for your business.
| 
