Q3-24: M&A Activity by Financial Investors Remains Down Amidst a Higher Interest Rate Environment
Financial investors, such as private equity (PE) funds, play a significant role in driving mergers and acquisitions (M&A) across various industries. Typically, PE firms fund acquisitions through a combination of equity and debt financing. However, since 2022, the rising cost of debt has significantly slowed the pace of M&A activity among financial investors. Historically, financing slowdowns caused by rising interest rates tend to stabilize as markets adjust. Yet, as of Q3 2024, M&A activity remains subdued — down 64% from peak levels seen a few years ago.
Does this signal a “new normal”? And, if you are a founder-owned or mid-sized business considering a sale, what does this mean for your prospects in a 2025 acquisition?
Source: IMMA: Institute for Mergers, Acquisitions, and Alliances, St. Louis FED Economic Data
The Impact of Interest Rates on Private Equity Deals
Private equity-backed buyers often rely heavily on debt financing to fund acquisitions. Elevated interest rates have two significant consequences:
Higher Cost of Capital: More expensive financing makes acquisitions less attractive.
Lower Valuations: Valuations are impacted because higher discount rates reduce the net present value (NPV) of a company’s future earnings, lowering the price PE firms are willing to pay.
For business owners, these factors directly affect acquisition dynamics and the potential value of their company in the current market environment.
Preparing Your Business for Sale
If you are planning to sell your company in the near-term, be proactive before you begin the sale process. With over $40 billion in M&A, Capital Raising, and Restructuring experience, the team at Keene Advisors recommends the following priorities:
Develop a value creation plan: Use private equity’s own playbook to create a compelling value creation plan. Your value creation and growth story are critical to achieve a premium valuation. Your value creation plan should include strategies to:
Accelerate topline growth
Improve margins
Improve cash conversion cycle and capital efficiency
Increase EBITDA: EBITDA is a key valuation metric. Focus on strategies to improve it, including:
Identifying Add-Backs: Adjust for non-recurring (one-time) expenses that can be excluded from your earnings. Examples include legal fees, consulting costs, or one-time product development expenses that won’t recur in the future.
Operational Efficiencies: Streamline operations to boost profitability and showcase sustainable earnings growth.
Next Steps
While there are numerous strategic steps to prepare for an acquisition, prioritizing lower leverage and higher EBITDA will enhance your company’s attractiveness to potential buyers. For a deeper dive, explore our resource: Top 5 Steps to Take When Selling your Business for actionable insights.
In a market where interest rates remain elevated and private equity M&A activity is subdued, preparation is key to maximizing value. Taking these steps now can position your business for a successful acquisition in 2025.
Keene Advisors is a Strategy and Financial Consulting firm and boutique Investment Bank that specializes in helping companies with $3 to $50 million in EBITDA optimize performance and prepare for inflection points. With over $40 billion in M&A, Capital Raising, and Restructuring experience, contact us today for a complimentary consultation to discuss how to tailor solutions to meet your company’s needs.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.