M&A Insights || October 2023

Good morning. In this quarter’s newsletter: Smaller deals making a big impact, the merits of back-office automation, plus access to insights to keep you well prepared to succeed. (Want to receive future quarterly M&A Insights newsletters? Sign up here.)

Smaller deals making a big impact

Three quarters into the year and we are seeing more of the same. Well, sort of. While it has been a difficult period for middle market mergers and acquisitions (M&A) deal-making, we are tracking some interesting developments unfolding in the marketplace.

Deal activity in the first half of 2023 mostly mirrored the second half of 2022, primarily due to macroeconomic headwinds, the Federal Reserve’s interest rate environment, and inflation wreaking havoc on middle market businesses and investors.

A growing discrepancy between buyers and sellers over enterprise value expectations has, in many instances, elongated deal processes or broken them altogether. Industry sources report that multiples (enterprise value/EBITDA) are down from prior years for the first time in a long time. This valuation reset could be good for the overall marketplace, but it will likely take a while to normalize fully.

For private equity buyouts, platform acquisitions remain at the lowest levels during the past decade; however, higher add-on transactions have partially offset this lull. Smaller deals are easier to complete and have become prevalent in the industry as part of a “roll-up” strategy, whereby multiple companies are acquired to form a much larger entity, thus consolidating the market.

RSM transaction advisory services hit a peak in July for the year, which could be a reason to get excited about the fourth quarter and heading into 2024. Meanwhile, our sell-side due diligence deal volume as a percentage of the total was higher than normal during the second and third quarters, which may indicate a busy post-Labor Day fall season.

The merits of back-office automation

Economic pressures and a potential recession have pushed many private equity portfolio companies into preservation mode. Chief financial officers (CFOs) are shifting their focus from high-stakes digital transformation to low-code automation of the back office.

For much less investment and little coding knowledge, you can streamline many back-office processes that involve tedious, repetitive, manual tasks across complex systems and applications to drive scalability. Let me share an example of how process automation helped one of our clients overcome its growing pains following a series of mergers and acquisitions.

RSM client benefits from process integration

After growing from eight properties to over 1,500, a global hospitality company’s business processes became highly disjointed among legacy groups, resulting in duplicative work and inconsistent service quality. Moreover, many of these processes were highly manual and time-consuming, leaving little opportunity for the staff to focus on strategic initiatives.

After a private equity firm acquired a majority stake in the company, the push to integrate processes across the organization accelerated. Leadership zeroed in on robotic process automation (RPA) as a first step in gaining efficiencies and engaged RSM to assist with selection and implementation.

RSM led an independent review of the company’s people, processes and technology to identify integration opportunities within existing applications. We leveraged “fit-for-purpose” technologies combined with RPA to optimize business processes and data flows.

By expanding platform usage to eliminate repetitive manual tasks, the company significantly improved its process efficiency, including a 65% reduction in manual account reconciliations. Productivity also increased, and by saving more than 350 full-time equivalent (FTE) hours per month, the company’s workforce was able to redirect their efforts toward core business functions and drive value.

Business-led technology enablement?has become imperative for middle market companies to succeed in these challenging times. As a leading provider of systems and solutions, RSM has the experience, industry knowledge and resources to help you drive value from the back office. We will also continue to monitor evolving marketplace dynamics to bring you more M&A insights next quarter.

/s/ Michael Fanelli and Gavin Backos