The M&A World through the Eyes of Buyers and Sellers (Part 1—The Sellers)
– Mark Goodale
As you just read in Mick Morrissey’s article, AE M&A transactions dropped 22% in the second half of 2022. So, is the balance of power shifting? Are sellers encountering more emboldened buyers? Are they being pressured at the negotiating table? Did they wait too long to get into the game?
For the answers to these and other questions about what the world looks like through the eyes of AE firm sellers and prospective sellers, I turned to Morrissey Goodale’s Brendon Cussio, Vice President and head of sell-side engagements. Here’s how the conversation went:
MG: Brendon, more and more prospective sellers are asking me whether they missed the boat. Did they?
BC: I get the same question—daily as a matter of fact. Many CEOs I talk to have seen their competitors and colleagues being acquired over the last few years. They’re running out of friends to commiserate with about failed internal transition plans and capital concerns, and they’re thinking, “Maybe I should have listened to myself and sold a year or two ago when the market was on fire.” Now those owners have new questions to consider: “Should I stay put in the face of a possible recession that could tank the demand for my kind of firm? Am I willing to stay in the business for a few more years to ride out a possible downturn and eventually transition internally? Or should I pivot now and sell externally or accelerate an internal transition?” In any case, there is still a strong market for good firms. The boat is still at the dock, at least for now.
MG: So the demand for AE firms is still there?
BC: Well-positioned buyers are still buying good firms. There is no change in demand for deals for quality firms that perform. Is the market as hot as it was six or eight months ago? No, not for every firm. For example, companies heavily focused on land development in cooling regions might present some concerns to potential buyers, especially those that are lender-backed. These days, firms that primarily specialize in land development might have a harder time telling their story and getting everyone on board. This slowly growing skepticism is not necessarily an indictment of the quality of these firms, but rather the business environments in which they operate. Note, however, that land development is not softening across the board. Projects are still moving forward, for example, in portions of Texas and the Southeast.
MG: How do you deal with that kind of skepticism?
BC: I’ll give you an example. We work with a firm that generates a good percentage of its revenue through land development-focused projects. The firm’s prospective buyer has a lender in the background who questioned the firm’s land development exposure and how a recession could impact the business. But the narrative in this case was that our client was well ahead of the situation and was already diversifying into public-sector work—they reassigned resources to where they anticipated demand will be strongest. To boot, backlog is solid and diversified. Because we had those two feet to stand on, we were able to adequately address the lender’s concerns and, as a result, the buyer did not try to renegotiate the deal based on our client’s current land development exposure.
MG: Is there still a stampede for AE firms focused on public-sector clients?
BC: Transportation, water/wastewater, and critical infrastructure firms can do no wrong as long as they are performing— which, by and large, they are given their record backlogs. And once the IIJA money finally arrives in earnest, even more opportunities will be created. One of our clients has attracted the largest demand we have ever seen from a sell-side engagement. We’ve had dozens of inquiries and expect IOIs from more than half of them. We haven’t seen terms of deals yet, but given the level of interest, we don’t expect the seller will need to concede on much of anything.
MG: So even as the number of industry deals have seemingly hit a plateau, are buyers not becoming more emboldened?
BC: There is certainly talk of a potential recession, which is on everyone’s mind; however, I haven’t seen buyers say they are worried about a recession and demanding sellers reduce value and adjust terms because of it. Nevertheless, if a seller’s expectations are too lofty from the get-go or if they are an average- or low-performing businesses, that’s a different story.
MG: Is it still a seller’s market?
BC: I’d characterize it as a market currently more favorable to sellers than buyers. Back in 2019, many deals were based on trailing three-year averages, not the last 12 months or even the forward-looking earnings that are more commonly relied upon today to determine value. We also saw more earnouts and less cash, often with more seller financing. Today, the majority of deals are largely cash with rolled equity when available, and seller notes and smaller earnouts—the latter typically used to at least partially hedge buyers’ bets against a drop-off from the record year many industry firms turned out in 2022. In any case, we are still seeing strong multiples with good terms.
For industry-leading M&A sell-side expertise and a bedside manner that’s second-to-none, call Brendon Cussio at 720.309.0704 or send an email to [email protected].
Tune in next week when Jon Escobar, Morrissey Goodale Vice President and head of buy-side engagements, peers into the world of AE firm buyers.