Essential Insights for Business Leaders on Selling in 2024
M&A deal flow in the U.S. decreased to its lowest level in 10 years in 2023, largely due to the spike in interest rates as the Federal Reserve aggressively moved to reduce inflation. In addition, the global economy stands at a crossroads, buffeted by a whirlwind of uncertainty stemming from factors including geopolitical tensions, economic fluctuations, and the lingering effects of a recent global health crisis. The anticipation of the upcoming presidential election has further added to the sense of unease permeating the business world. While technological advancements, particularly surrounding generative AI, have created excitement and led to a surge in the stock market, uncertainty and the economic environment have tipped the scales, creating deterrence and hesitation in investing and deal-making. As a result, business owners seeking transition are compelled to wait for a more favorable environment conducive of higher valuations.
The year started with an upbeat anticipation that the Federal Reserve would move forward with a series of rate cuts as suggested in November 2023. However, as data on inflation and unemployment was released in the first months of 2024, it became clear the timing of the cuts would be delayed. While it is difficult to predict when inflation (currently above 2% target) and the tight labor market (we are at a record-low 3.8% unemployment rate) will move within an acceptable range, there is still optimism that the economic environment will shift later this year and the Fed will follow through on rate cuts, which will stimulate the capital markets.
While inflation and unemployment will be the primary drivers impacting capital markets, the election year also introduces uncertainty into deal-making due to the potential for policy changes influencing economic conditions, industry regulations, and investor sentiment. Additionally, the rhetoric of candidates can sway market expectations and shape investor behavior, potentially affecting the timing and nature of mergers, acquisitions, and other corporate transactions. In the run-up to the election, businesses should consider delaying or accelerating deal-making activities as they assess the potential implications of different policy scenarios on their strategic priorities and bottom line.
Once interest rates begin to come down, and if the election cycle poses favorable business conditions, the environment will be welcome given the pent-up demand for transactions. According to data from Bain & Co., global private equity exits are at a 10-year low, and deal value and deal count have fallen 60% and 35%, respectively. As a result, private equity portfolio companies held five years or longer grew 18% year over year in 2023, and companies held for four years or longer comprised 46% of the total, the highest level since 2012 creating a sense of urgency for liquidity. In addition, baby boomers are increasingly feeling the pressure to sell businesses as they hit retirement age, and there is vested interest from this group for improvements in the capital markets (i.e. valuations). The pent-up demand extends to the buy side. According to S&P Global, in December 2023 private equity funds were sitting on a record $2.59 trillion in capital to be deployed. The capital markets are very clearly primed for increased activity at the first sign of improvement from our current environment.
For business owners seeking to transition their company, taking measures to position the company in the most favorable light is imperative. Prospective buyers value growing companies with consistent, repeatable cash flows. To ensure the likelihood of success, the company should institute a strategic planning framework, subject to ongoing monitoring and adaptation. Financial systems should be developed to ensure timely and accurate financial reporting, complemented by robust budgeting and forecasting mechanisms. But most important to establishing a successful future is to assemble a competent management team, ideally with a continuity plan post-transition. Adherence to these concepts consistently yields favorable outcomes in the capital markets, facilitating swift transitions at elevated valuations.
The enthusiasm for technological advancements, specifically generative AI, adds to the potential upside in capital markets. AI stands as one of the most revolutionary advancements to date, with its power, capabilities, and economic impact only now beginning to emerge fully. Advancements in AI create opportunities in virtually every sector for businesses to gain a competitive advantage operationally. Equally as important will be the utilization of AI for data analytics and financial reporting to enhance decision-making processes and identify market trends. The impacts will play out in the coming years and the opportunities in the capital markets are a source of excitement for investors and business owners. Staying competitive by leveraging artificial intelligence in business operations and driving data analytics will provide a competitive edge and enable businesses to adapt more effectively to changing market dynamics, which will ultimately result in higher valuations.
The clouds of uncertainty over the economic outlook and the pause in the capital markets have been a recurring theme over the past year. However, there is optimism that inflation will subside, labor markets will loosen, and the Federal Reserve will act to reduce interest rates. Business owners should stay informed about the economic indicators that drive capital markets. As economic conditions unfold, it will be critical to maintain a focus on long-term value creation, with particular attention on opportunities for innovation and utilizing technology. With prevailing indicators signaling a favorable outlook for the capital market in the near future, it's essential for business owners considering a sale to prepare diligently for this anticipated shift.
