The M&A market witnessed a slowdown during 2023 attributed to rising interest rates and tighter debt markets, prompting private equity firms to target smaller acquisitions in the lower middle market. Private equity deal volume reached all-time highs in 2021 as a result of historically low interest rates and strong economic growth before declining 9.4% in 2022 and 16.1% in 2023. However, the number of smaller add-on acquisitions remains above pre-2021 levels, while larger platform acquisitions remain lower.¹ 
 
Smaller M&A transactions are expected to drive growth in deal activity over the next year. An annual survey of executives and financial advisors conducted at the end of 2023 showed that 52% of respondents believe that small-market deals (below $100 million in transaction value) will drive growth in M&A transaction volume in 2024, while 57% believe transaction volume in the $100 million to $1 billion range will stay flat or decrease in 2024.² 

Additionally, there has been an increase in business owners’ awareness of the sale process, with private equity investors directly approaching them for acquisitions. This shift suggests a growing need for advisors to facilitate discussions on exit plans and ensure involvement throughout the sale process to optimize outcomes for their clients. 

Middle Market M&A Market Insights 

• After a period of record M&A activity from 2021 to 2022, M&A transaction volume slowed over the last year as interest rates increased, debt markets tightened and industry consolidators shifted their focus on integrating recent acquisitions.³ 
• In the last year, private equity firms moved more downstream to the lower middle market in search of smaller strategic add-on acquisitions, which could be financed with their portfolio companies’ balance sheet (e.g., cash and lines of credit). As a result, lower middle market transaction volume was less impacted by rising interest rates and tightening credit conditions in 2023.⁴

Unlocking Opportunities in M&A: Mariner Capital Advisors (MCA) 

• Because most of MCA’s client transactions fall in the $10 million to $50 million range that many private equity and strategic buyers seek for add-on opportunities, MCA was mostly shielded from the slowdown seen in middle market M&A activity last year. 
• While MCA saw good M&A activity in the second half of 2023, deal flow so far in 2024 has been great. 
• MCA currently has nine active sell-side M&A engagements, two of which are currently under letter of intent and on a path to closing. MCA has three engagements that are currently on the market and four engagements that will be brought to market in the second quarter of 2024. These engagements have the potential to generate up to $150 million in liquidity for the owners and new assets to be managed by their advisors. 
• MCA’s pipeline of prospective sellers continues to grow, a trend we expect to continue as a result of the aging business owner population. A total of 87% of small-business owners in the U.S. are Generation Xers (47%) and baby boomers (40%). 
• Business owners have become better educated in the sale process as they are increasingly approached by private equity investors seeking proprietary acquisition opportunities. Private equity investors across various industries reach out directly to business owners in an effort to find willing sellers and avoid a competitive sale process. By avoiding competitive sale processes like those facilitated by investment banking firms like MCA, private equity firms hope to avoid having to outbid other acquirers for the same opportunity. 

Enhancing Advisor-Client Collaboration in Business Sale Strategies

• MCA can help advisors initiate discussions with their business owner clients and prospects about topics such as their exit plans, business valuation and how to achieve the best outcome through the process of selling their business to a third party. 
• The greatest value-add MCA offers advisors is to help ensure that if the sale of a client’s or prospect’s business occurs, the advisor is involved in the process from the beginning and ultimately is managing the seller’s assets post-closing. The closer the advisor is to the client’s sale process at the onset, the higher the likelihood that the advisor will be asked to manage the client’s new assets. 

Please reach out to the MCA team or Tom Tilley at [email protected] if you have any questions or any business owner clients you would like to discuss.

Sources:

¹“2023 Annual US PE Breakdown”

²“19^th Annual Mergers & Acquisitions Outlook Survey”

^3,4“2023 Annual US PE Breakdown”

This material is intended for informational and educational purposes only. No representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. Reliance upon information in this material is at the reader’s sole discretion. 

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