This year began with a careful merger and acquisition (M&A) outlook, as interest rates, a predicted recession and inflation contributed to an uncertain economic and borrowing environment. While deal volumes have declined 4% from last year, they are still above pre-pandemic 2019 levels‡—setting up a steady finish in 2023 for M&A activity. 

Factors influencing M&A activity

There are numerous factors that have M&A activity in the crosshairs of alternative equity and growth companies alike. The pent-up interest has been fueled by historic levels of balance sheet liquidity ready for deployment, acceptable interest rates on leverage, and supply chain concerns and labor shortages. At the same time, Baby Boomers are increasingly seeing the opportunity to profit by selling their business. These ingredients have kindled a record-level activity in the market.

Additionally, we’ve seen strong, widespread interest in private equity and direct investing – acquiring controlling or non-controlling interests in operating companies as an investment—and sideline capital is eager to be put to use at rewarding returns through private equity commitments. Family offices and individuals with significant wealth have seen the broader public equites market provide a less compelling rate of return over the last decade and, because interest rates were low for so long, they shifted away from fixed income.

Instead, we see both strong investor preference and tolerance with the risk/reward profile found in small to middle-market companies. Through a common denominator of accessibility and increased demand for alternative investments, we’re seeing an oversubscribed amount of activity involving committed and uncommitted funds supporting this trend.

Considerations for leadership when considering a merger or acquisition

Business owners work tirelessly to refine their offerings and position their business for sustainable success. It’s critical that the executive leadership team consider the implications and attention necessary for M&A as the commitment for a successful transaction can take away focus from the day-to-day of the business. Also, business owners need a detailed plan that can be executed within a three- to five-year window. There are several questions to consider when preparing for a sale and transition plan conversation. A few seed questions include:

  • What does a successful transition look like for the employees, customers, and shareholders?
  • Are there any family members or other management who may want to champion the business?
  • Do my financial partners have a shared vision for success?
  • Is it a strategic, financial or social impact buyer?

The inverse of the sale-side of M&A is opportunistic growth or the buy-side. Post-acquisition, the strength of a business often hinges on a well-executed transaction. The executive leadership team should formulate clear parameters of what the acquisition strike zone looks like for their company. A few guiding principles should be considered:

  • Understand how an acquisition impacts your customers, employees, and shareholders
  • Expanding your company from local to regional, regional to national, and national to international – Identify the risks and rewards of an acquisition versus organic growth specific to your situation
  • Establish an appropriate target size and determine at what level passenger equity is appropriate versus pure balance sheet strength
  • Stay within your core competencies and clearly understand the risks of new ventures

How your bank can help navigate through a merger or acquisition

A well experienced bank can help businesses through all stages of their lifecycle, from the small seed stage to growth or sale. As an executive team considers their trusted financial partner to navigate M&A, we recommend a few simple interview questions for your financial provider:

  • Do they have experience with deals in your industry?
  • Can they provide references and related transactions?
  • How did they operate in the last several recessions and how do they react in unexpected downturns?
  • At what level are you able to access leadership within the bank including risk and credit decisions?

Preparing your business for M&A takes a great deal of time and foresight and a trusted financial partner can help you navigate the tailwinds for a secure landing.

To learn more about the commitment of UMB Bank as your business’s trusted financial partner, visit umb.com. 

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