A Look Ahead Into 2024
David Prowse CPA, CA, CVA, CEPA, CMAA
M&A | Growth & Exit Planning | Business Valuation
Introduction
A new year has begun and if you are a business owner considering your options heading into the new year, this will provide some useful guidance for you. The first thing to remember is that if you are not planning on selling your business this year (because you are knee-deep in a well thought out value acceleration plan, right?), worrying about the state of the market right now isn't productive. What is important to remember is that working on improving your business in a persistent and methodical fashion is much more important than trying to time the market. There will always be a market for good companies. Your goal is to be one of those good companies. That will open up the number of options available to you.
That being said, understanding the direction of the market is a worthwhile endeavour if you are committed to eventually selling or transferring your business. The reason? Educating yourself on the market in which you compete along with the success factors of businesses that transact is intrinsically connected with your mission to exit successfully.
The following are figures from the recently released Middle Market Growth: Multiple Report by the Association for Corporate Growth ("ACG")[1]. Additionally, some figures were derived from "A 2024 M&A Update" by Mercer Capital[2]. We would invite you to check both of those sources out. The following are some key points from those sources and our commentary on what is most relevant to remember.
Market Outlook
Exhibit 1--Market Outlook (from ACG Members)
In Exhibit 1 above, we can see the outlook for the M&A market in 2024 is expected to be busier than in 2023. The majority expect the market to be busier while only 17.6% expect it to be slower. 2023 was a bit of a slower year for several reasons including uncertainty over the economy, interest rates, and generally a lower number of deals. This also had an impact on valuations as well.
Headwinds In 2024
In Exhibit 2 below, the key impediments towards growth in 2024 were outlined by ACG members. The two biggest were high interest rates along with economic uncertainty. Interest rates hamper deal activity because they make debt more expensive and since debt is often used to fund deals, it makes deals harder to justify (from either a seller's or buyer's perspective) due to either higher costs of capital or lower valuations. Economic uncertainty also hampers activity due to more buyers and sellers taking a “wait and see” approach. This can create opportunities for buyers who are willing to act early in a new up-cycle, however, this approach is risky since a prolonged recession might mean buying at relatively high valuations.
Exhibit 2—Headwinds in 2024
Needless to say, these headwinds are expected to have an overall negative impact on valuations heading into 2024. Only 8.8% of respondents believe that multiples will rise while 37.2% believe valuations will fall into the new year. A slim majority believe that multiples will stay the same. This is shown below in Exhibit 3.
Valuation Expectations
Exhibit 3—Valuation Expectations in 2024
International M&A
With ACG being primarily a US-based organization, the question was asked of respondents whether their clients had an interest in international targets, and if so, where. Exhibit 4 shows that Canada was a favourable place to invest with over 74% of respondents saying their US-based clients were considering buying in Canada, with Europe falling slightly behind in terms of attractiveness. This is good news for Canadian business owners looking for exit options in the next few years since they do not have to solely rely on domestic purchasers to provide exit liquidity.
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Exhibit 4—Areas of Interest in International M&A
Deal Flow
Despite the concerns heading into 2024, respondents believed that deal activity was going to increase in 2024 in terms of number of deals. This bodes well for business owners considering an exit in 2024 despite some economic gloom, sentiment is still fairly positive.
This is in contrast to deal-flow activity in the last few years where the number of deals (Exhibit 5) and dollar value of deals (Exhibit 7) have been declining. This is partially attributable to a post-pandemic increase in activity due to pent-up demand in deals (That is, deals in the work pre-pandemic are now being transacted).
?Exhibit 5--Deal Numbers By Buyer Type
Exhibit 6--Deal Numbers (Volume & Value)
Key Takeaways
·???????? Activity in the M&A space slowed in '23 compared to 2021. The rush of activity in '21 was largely due to post-pandemic pent-up demand.
·???????? Activity is expected to increase in 2024.
·???????? Canada is an attractive investing ground for US-based companies.
·???????? Most practitioners believe multiples will remain similar to last year.
Remember, if you build an excellent business, you don't have to worry about timing the markets. Building a good business means building value, increasing your exit options, and maximizing your chances for success.
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Growth and Value Strategist | Building and implementing strategic exit plans | Developing Leadership Teams | Fractional CFO | Author |Featured on Fox, NBC, CBS, ABC and others.
1 年David Prowse CPA, CA, CVA, CEPA, CMAA, great article with lots of useful information going into 2024. I believe the most important point you make is "Remember, if you build an excellent business, you don't have to worry about timing the markets. Building a good business means building value, increasing your exit options, and maximizing your chances for success." No matter what, the key is always to be building a good, maybe even great, business.