Effects of COVID on Middle Market M&A

Phew… 2020 is now over. And we can say that we have never been more enthusiastic and hopeful for a new year than now in the last few decades. So, coming back to business talks, the merger and acquisition market has started to come back to its pace – slowly but steady. After a dramatic drop in the late spring and summer, even the slight nudge of growth is a good sign.

Here, we are talking about the several deals that have been closed under $100M in the third quarter, approximately about 12% of the deals made last year. It is a good sign for the fourth quarter, although it is still very less than what we saw in 2019. It indicates a smaller average deal size.

Companies and industries are looking out for the best M&A advisory services in the middle market. They have fared well or held their own during COVID, including consumer products and technology that are great rebound in M&A.

Effects of COVID on the Middle Market M&A

Private equity looking for add-on deals

Private equity buyers are looking out for opportunities to invest their money. They are particularly looking for add-ons or smaller companies that can be folded into their exiting portfolio. In 2020, 35% of business acquisitions in North America happened through private equity buyers. And add-on transactions of all the private equity deals were about 73%.

Add-on transactions help in mitigating the risk of investment in the industries that are already known. With add-on transactions, people can enhance profitability and leverage synergy with their existing portfolio companies.

Strategic Acquirers Also Active 

People are looking forward to partner with the best m&a advisory services in the middle market. People are looking at 2020 and 2021 to make acquisitions designed to broaden their business and diversify their own business. It helps them elevate their customer base and fill the holes in their distribution channel mix or product mix. With added experience, personnel or key technology helps them improve their business.

Financing on a case by case basis

Lenders are now more open to financing transactions on a case by case basis. The acquiring business and target business can show resilience. Due to covid, the interest rates are low, and SBA lenders are trying aggressively to provide finance for deals where the sellers are showing promising business.

Venture capital funding deal size up and number of transactions down

Venture capitalists have continued to invest throughout the pandemic. The overall investment in the 3rd quarter of 2020 was even greater than in the 3rd quarter of 2019. But also, the number of venture capitalist transactions fell. Some investors are more inclined towards less risky later-stage investments vs. early startups.

Focus on Growth and Profitability 

Companies experienced growth in 2020, and as a result, the trends will continue post-pandemic. People are looking out for online retail, remote work arrangements, health and wellness, and other industries to invest in. Buyers are more focused on profitability metrics, such as growth and net margin, marginal profit, etc. For this, they are using the best m&a advisory services in the middle market.

It doesn’t mean companies that are not profitable in 2020 were not considered for mergers or acquisitions. People are counting on companies that will bounce back once the pandemic is over.

Author: Salvador Moreno