Ramsey Goodrich and Terry Hannafin represented CMG at the 2024 M&A East conference, hosted by ACG Philadelphia, where over 1,000 private equity groups, investment banks, and lenders gathered to discuss deal flow, market trends, and the future of M&A. After numerous conversations with fellow attendees, we distilled several key insights that reflect the current state of the market for middle-market M&A.
Add-On Overload: M&A’s New Normal
While overall M&A activity is up, 2024 has been driven by add-on acquisitions, rather than new platform investments. Add-ons are easier to finance and diligence, provide the ability to leverage synergies and allows investors to deploy capital efficiently while building value in their existing portfolios. As the middle market M&A markets continue to ramp, the focus will become more balanced between add-ons vs. platform investments which should provide more opportunities for great companies.
“Risk On”: Financing the Future
Another welcome trend is that lender interest rates are on the decline, supporting more robust financing conditions. With a 50-bps reduction in underlying rates and a 50-bps reduction in spreads (risk premium), the overall effect is nearly a 1% reduction in cost of debt capital. The “risk-on” environment is favorable for both buyers and sellers, offering more attractive terms and financing options for deal-making which in turn should continue to support strong valuations.
Off the Fairway: Seeking Diamonds in the Rough
With a renewed confidence in the market, investors are increasingly willing to look beyond the usual suspects (‘center of the fairway’ deals) and are starting to look unique investment opportunities (‘diamonds in the rough’). More recently investors are willing to back companies that show potential even in ‘unfairly unloved’ industries. For sellers, this means that even if your business is unconventional or in a unique niche market, there is now likely an audience willing to listen—so long as the fundamentals are strong.
The Service Surge and the Manufacturing Gap
While service-based companies continue to dominate M&A activity (asset light businesses with recurring revenue), it’s becoming a ‘picked over’ field with fewer great targets coming to market. As a result, many investors have a renewed appetite for quality manufacturing companies, especially as interest rates continues to fall. This shift presents a golden opportunity for manufacturing businesses to stand out in a market filled with service-based competitors.
Ghost Hunting: The Diligence Deep Dive
One of the most notable continuing trends is the incredible thoroughness of buyer due diligence. Buyers and investors are going deeper and deeper in their assessments, seeking to uncover any hidden risks, or “ghosts,” within companies. This increased scrutiny is prolonging closing timelines and requiring sellers to be more prepared than ever before. The key takeaway for family-owned and closely held businesses: anticipate this intense focus and over-prepare prior to approaching the market. Address potential concerns upfront to avoid surprises that could stall or even derail your deal.
These insights point to both opportunities and potential challenges for business owners considering their ‘once in a lifetime’ transaction in the current market. At CMG, we advise sellers to be proactive: anticipate heightened diligence, stand out in crowded industries, and take advantage of a recovering market that is growing even more hungry for well-run companies.
Contact Us
Whether you are actively considering an exit or just curious about options for the future, we would love to connect, learn more and truly understand your objectives. We are happy to share our insights and help explore strategies to maximize the value of your company and enhance the legacy of your business.
Ramsey Goodrich
203-349-8375 (Direct)
203-554-2435 (Mobile)
RGoodrich@CarterMorse.com
Terence Hannafin
203-349-8374 (Direct)
516-381-7497 (Mobile)
THannafin@CarterMorse.com