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2016 was an active year in M&A for mid-market decision makers, driven largely by a continued sluggish economy, a perception of topped out valuations and concerns that the period of low interest rates was coming to an end. Heading into 2017, mid-market Buyers and Sellers are feeling a greater sense of urgency to close a deal, though the post-election environment bears watching.Just prior to the election, a survey of potential Sellers demonstrated the market had reached a peak and valuations wouldn’t hold. Adding to that was an expectation of higher capital gains taxes, which led many to believe that their window of opportunity was closing. While 2016 proved that confidence didn’t always translate into action, our survey showed Sellers are more optimistic heading into 2017. We found that 53% of Sellers are currently involved in or open to making a deal in 2017 (up from 34% in 2016), with 25% of organizations saying they are extremely confident that their organization will be acquired in the coming year.For Buyers, there is increased pressure to show revenue growth after an inability to do so organically in recent years, leading to robust Buyer interest throughout the market. This belief is evidenced by 73% of Buyers indicating they are currently involved in or open to considering making an acquisition (up from 60% in 2016), with 23% of Buyers indicating extreme confidence that they will make an acquisition in the next 12 months.It should also be noted that prior to the national election, both Buyers and Sellers anticipated little change in the post-election business environment, regardless of which party was elected. However, early indications are that the reality may be somewhat different. A potential lowering of capital gains and estate taxes, as well as hints of a less restrictive regulatory environment and future stimulus spending, have led to a post-election rise in U.S. equity markets in anticipation of a period of accelerated economic growth. As a result, there is now a growing sense among some mid-market decision makers that company valuations may not have peaked just yet.Regardless of how the 2017 business environment plays out, as more deals are explored, third party advisors will play a bigger role in M&A activity in the year to come. Both Buyers and Sellers are increasingly feeling the need to hire advisors and will continue to look to them for assistance in managing valuations, performing due diligence and ensuring a deal gets done to both side’s expectations.
Selling Activity is Ramping UpThe market is poised for much more selling activity than was seen last year. More than half of the market is currently involved in or open to selling in 2017, up from 34% in 2016. Mid-market decision makers understand that valuations are not likely to hold for much longer and this, coupled with looming economic uncertainty, has decision makers feeling a greater urgency to sell. It should be noted, however, that the post-election run up in U.S. equity prices may translate to an expectation among some private owners that even higher valuations are still possible in 2017, which may dampen some of their urgency to sell.
Window of Opportunity is ClosingLast year, just over 4 in 10 Sellers felt that there would be a significant financial crisis in the next 3 years, and the general sentiment was that the window of opportunity for the right deal was beginning to close — and could slam shut — as a result of a major financial downturn. This year, nearly 6 in 10 Sellers surveyed believe that there will be a significant financial crisis in the next 3 years, which has instilled an even greater sense of urgency among those selling.
Capitalize on High Valuations Valuation was the top concern for Sellers last year, when half those surveyed were extremely concerned with being undervalued. That number has dropped significantly, to less than one-third, this year.With valuations as high as they are, Sellers recognize that the likelihood of being undervalued is low and their window of opportunity could be closing.This sense of opportunity will lead to increased activity throughout the market, as waiting may no longer prove to be advantageous.
About Kratos Capital
As a top-tier provider of M&A and debt capital markets services, Kratos Capital Corporate Finance & Capital Markets provides comprehensive financing, advisory, structuring and distribution services to support:
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