Bain Report Serves Up 2023 M&A Insights

Bain has finally released its review of the2022 M&A market. While Bain caters to higher end clients who form the backbone of the economy, these businesses often work with middle and lower middle companies—or purchase them. Thus Bain’s report has far-reaching implications across the market. Here are the three most important highlights.

A Clear M&A Thesis Matters

Too often, sellers focus only on getting buyers to sign on the dotted line. They don’t consider why a buyer is investing, or whether a different buyer might be a more successful investor (or one who is willing to pay a higher price).

Respondents to Bain’s survey reported that a clear deal thesis was the major driver of M&A deals that outperformed industry and market norms. This suggests that owners devising an exit plan must include identifying their ideal buyer in that plan. Some factors to look at include:

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•The buyer’s reason for investing in the business.

•The buyer’s prior history running businesses.

•The buyer’s ability to access funding.

•A clear commitment to developing an effective integration plan.

•The buyer’s understanding of each company's culture.

Buyers and sellers are more successful with a detailed due diligence process, and a clear integration plan that includesrepresentatives from both businesses. A buyer who cannot commit to both cannot commit to the business.

Valuations Are Universally Down

On average, valuations declined 22% year over year for strategic private equity deals. Non-strategic M&A may have seen an even more dramatic dip. In previous years, we’ve witnessed contractions in specific sub-sectors, but the contraction in 2022 was distributed almost totally evenly. Median EBITDA multiples were around 11.9x, with tech sector businesses seeing much higher multiples.

The Critical Importance of Cultural DueDiligence

Cultural mismatches are among the leading reasons mergers fail or under-perform. But understanding and outlining a business’s culture can be challenging, especially for owners. For owners, the culture is the water they swim in, and it’s tough to identify what makes the water unique. Culture is not intangible or unimportant, though. It’s critical to the success of the business and the retention of its employees. Cultural due diligence is as important as legal due diligence. Some factors to look at include:

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•decision-making processes

•workplace cultural and social norms, such as how employees communicate

•owners’ working styles

•organizational values and goals

•key stakeholders, and how their needs and desires figure into business decisions

Consider whether the businesses use specific methodologies to make decisions and communicate, or whether they rely more on intuition. If it’s the latter, look at the specific principles that help guide intuition, who is involved in decisions, and how power flows throughout each business.

The Bain report provides significant insight into how the looming recession could affect businesses this year, and how fears of recession was already affecting M&A last year. As always, preparation is key. The right M&A advisory team drives value and can help shepherd a deal to successful completion.