M&A Exit Strategy: Conducting a Full Business Assessment

Explore how a full business assessment is key in your M&A exit strategy, evaluating strategic positioning, operations, and financials to maximize company value.

You’ve  heard the saying, “It’s not personal, it’s business.’ But when it comes to selling your company, it’s both. Your business is more than just an asset. It’s your legacy, your retirement nest egg, and a reflection of years of hard work and personal sacrifice. Yet, the stark reality is that, according to the Exit Planning Institute, fewer than 30% of businesses that go to market actually sell. This alarming statistic indicates that most business owners haven’t prepared a comprehensive exit plan.

To get top dollar for your business, you need an M&A exit strategy. At Freeman Logan, conducting a full business assessment is one of the first, perhaps most critical, steps we take to prepare a business for exit. Its purpose is straightforward: To identify what it will take to maximize your business’ value and make it appealing to potential buyers. 

In a full business assessment, your mergers and acquisitions advisory firm thoroughly evaluates your company’s strategic positioning, operations, and financials. This in-depth analysis informs your exit strategy and readies your company for sale, ensuring that you are not just selling — but selling smart.

In this article, we’ll walk you through what a full business assessment for M&A purposes entails, showing how each step is critical in yielding a successful and lucrative exit strategy for your business. 


Why a Full Business Assessment is Crucial for M&A Exit Planning

Whether you’re considering selling your business in 12 months or 12 years, it’s never too soon to develop your exit strategy. The first step is to thoroughly assess your company, focusing on its strategic positioning, operations, and financials. This assessment lays the groundwork for your exit plan, helping you understand the full scope of your business activities to better prepare and optimize them for a future sale.

Here are the five objectives of our full business assessment:

  • Determine an Accurate Value: We help owners understand a realistic value range for a potential sale, considering all tangible and intangible assets. 
  • Identify Strengths, Weaknesses, and Risks: We look for the value-drivers in your business that attract buyers and highlight areas needing improvement. We also identify and mitigate risks along the way.
  • Prepare for Due Diligence: We start organizing essential business information that a potential buyer will scrutinize, like financial records, legal documents, contracts, and operational data. This process facilitates a smoother and more efficient transaction.
  • Reveal Opportunities for Improvement and Growth: We uncover new areas where your business can grow and become more efficient, enhancing future prospects and market attractiveness.
  • Strengthen Stakeholder Confidence and Negotiating Position: With a clear understanding of your company’s health and potential, you are better positioned to get stakeholder buy-in and negotiate favorable terms.

Now that you know why a full business assessment is a critical first step in your mergers and acquisitions exit strategy, let’s dive into the three main areas of assessment:  Strategic positioning, operations, and financials. 


Strategic Positioning Assessment

In a Strategic Positioning Assessment, your mergers and acquisitions advisor closely examines your company’s current position in the market. As part of Freeman Logan’s Exit Prep Academy, we analyze your company’s overall strategy, business model, performance metrics, marketing strategies, and whether your company is organized effectively to meet your goals. 

This assessment aims to identify the company’s strengths and weaknesses, competitive advantages, and potential areas for growth. It’s a critical step for understanding where your business stands in its industry and how you can improve its positioning for a successful sale. 

Key tasks we undertake in this assessment include:

Review Business Strategy 

We analyze your current business strategy to assess its effectiveness and alignment with market trends and opportunities. This review helps us understand whether the current strategy positions the business for growth and success in its sector.

Evaluate Business Model 

We evaluate your business model to understand how your company makes money and competes in the market. We look at what you sell, who your customers are, and how you deliver your products or services to determine business viability, profitability, and scalability. 

Analyze Performance Based on OKRs 

Your OKRs (Objectives and Key Results) are like a report card for your business, showing how well you’re meeting your goals. A mergers and acquisitions consultant reviews these to understand your company’s success and where it stands in achieving important milestones. This analysis is vital in identifying strengths and areas needing improvement. 

Assess Marketing Strategy and Positioning

In reviewing your company’s marketing strategy, we focus on how your business differentiates itself from competitors and how effectively it captures its target market. We review your sales tactics, understand market trends and customer needs, and identify your unique selling points. The goal is to enhance your brand’s appeal and identify growth opportunities, making your business more attractive for a potential merger or sale. Along the way, we look for ways to sharpen your brand message and outreach strategies. These recommendations form part of a broader exit strategy to increase your market reach and company valuation. 

Organizational Alignment and Functionality

We also assess how well your company’s organizational structure, culture, and operational mechanisms align with its strategic objectives. The goal is to ensure that every part of your company works well together; a well-aligned and functional organization is more attractive to potential buyers, as it suggests a smoother transition and continued success after the merger or sale.

Each task in a Strategic Positioning Assessment provides a comprehensive view of your business’s current status and what strategic moves are necessary for a successful exit.


Operational Assessment

In our operational assessment, we closely examine how your business runs. We check out what you sell, who you work with, and how your team is set up. We also see how you handle sales and use your office and technology. In short, the Operational Assessment gives us a clear idea of how your business works daily.

As we learn more about your business, we’re examining its operational strengths and weaknesses in the following areas:

  • Products and Services: What products or services do you offer? Do they meet customer expectations and keep up with the competition?
  • Human Resources: How is your workforce structured? What kind of leadership is in place? Are the skills employed in line with your business needs? How engaged is your workforce, and what is the company culture like?
  • Technology and IT: Are your technology and IT systems up-to-date and adequate for your business needs?
  • Physical Infrastructure: Is your physical infrastructure suitable for your current and future business operations?
  • Supply Chain and Logistics: How reliable and cost-effective are your supply chain and logistics? Are there any vulnerabilities or areas for improvement?
  • Production and Fulfillment: What are your processes like in production and fulfillment? How is quality control managed, and what is the level of customer satisfaction?
  • Legal and Compliance: Are all legal and compliance aspects up to date and in order, including regulations specific to your industry?
  • Operational Scalability: Can your current operations support future growth? What changes might be needed to facilitate expansion?
  • Risk Management: How effective is your risk management strategy? Are potential risks being identified and mitigated?

Through these inquiries, we gain a comprehensive view of your operational strengths and areas for improvement, guiding the development of a robust exit strategy. 

Selecting an M&A advisory firm specializing in your industry or sector is crucial for an effective Operational Assessment. They understand your market’s competitive landscape, are up-to-date with current trends, and can effectively communicate in industry-specific terms during negotiations. For example, Freeman Logan, with its expertise in the IT Services & Software, Telecom, Digital Marketing & Media and Business Services sectors, deeply understands the operational challenges and opportunities unique to these fields. This specialized insight is critical to making informed decisions that can significantly enhance your company’s value, ensuring you achieve the highest possible bid.


Financial Assessment

A thorough financial assessment is essential to inform your M&A exit strategy. It serves two purposes: firstly, to organize and tidy your books in preparation for an acquirer’s due diligence, and secondly, to explore ways to restructure debt, manage capital, and improve cash flow, all aimed at increasing your company’s value. At Freeman Logan, our financial assessment covers several important areas, such as:

  • Revenue and Profit Analysis: We study your revenue streams and profitability to understand the financial strength of your business.
  • Operating Expenses: We identify cost-saving opportunities and aim to understand the total cost of your operations.
  • Cash Flow Analysis: We analyze your cash flow to assess the liquidity and day-to-day financial health of your business.
  • Asset and Liability Review: This involves evaluating your company’s assets and liabilities to gauge its net worth and financial stability.
  • Financial Record Keeping: Accurate and organized financial records are vital for due diligence and valuation purposes.

A well-conducted financial assessment ensures that your financials are in order and equips you with the knowledge to make strategic decisions that enhance your company’s appeal to potential buyers. 


Plan Your Owner Exit with Confidence  

A recent Deloitte 2024 M&A Trends survey revealed that having an M&A exit strategy is the most important factor for a successful exit, highlighting why you should plan early and take consistent steps to enhance your company’s value. Conducting a full business assessment is the foundation of your entire M&A exit strategy, providing insights for improvements in operational, financial, and strategic positioning to increase your company’s appeal in the market. 

At Freeman Logan, we leverage our extensive experience in mergers, acquisitions, and alternative deals to guide you through this essential process. Our team is committed to providing tailored solutions that align with your unique business needs and personal goals. 
Reach out to schedule a consultation with us today.

Mergers vs. Acquisitions: What is the Difference?

The term “mergers and acquisitions” is often referred to as a single, unified area of business activity — as a result, the nuances between the two aren’t always clear. Here, we will explore the key differences between mergers and acquisitions and how they offer our clients two distinct strategies for corporate growth and success. 

The term “mergers and acquisitions” is often referred to as a single, unified area of business activity — as a result, the nuances between the two aren’t always clear. 

A merger is a strategic partnership where two companies voluntarily unite to form a new entity. Both parties pool resources and operate as shared owners, aiming for mutual growth and benefits. In contrast, an acquisition involves one company absorbing another, typically signifying a shift in control and strategic direction.

Here, we will explore the key differences between mergers and acquisitions and how they offer our clients two distinct strategies for corporate growth and success. 


Understanding Mergers

A merger occurs when two companies, often of similar size and scope, come together to form an entirely new entity. This collaborative effort is driven by a mutual decision, where both companies dissolve their individual identities to create a unified organization with shared goals and strategies. Several primary elements characterize the merger process:

  • Creation of a New Entity: Unlike other types of business collaborations, a merger results in the formation of a new company. This new entity typically adopts a new name, management structure, and operational approach, representing a blend of the strengths and cultures of the merging companies.
  • Shared Ownership and Management: In a merger, the ownership and control are equally distributed among the shareholders of the original companies. This distribution reflects the merger’s collaborative nature, where both companies have an equal stake in the new entity.
  • Strategic Motivations: Mergers are often motivated by the desire to expand market share, enter new markets, achieve economies of scale, and enhance overall competitiveness. By merging, companies can combine their resources, technologies, and market presence, creating a more robust and competitive entity.

Understanding Acquisitions

In contrast, an acquisition involves one company (the acquirer) taking over another (the target). This process does not result in the formation of a new entity. Instead, the target company becomes a part of the acquirer; the target company often maintains its operational presence but under new ownership and control. Critical aspects of acquisitions include:

  • Transfer of Control: The most distinguishing feature of an acquisition is the transfer of control from the target company to the acquirer. This transfer can be a friendly, mutually agreed upon takeover or a hostile one, where the target company resists the acquisition.
  • Financial Transactions: Acquisitions often involve significant financial transactions, where the acquiring company purchases the target company for a determined price. This transaction can be made through cash, stock exchange, or a combination of both.
  • Strategic Objectives: The primary objective of an acquisition is to strengthen the acquiring company’s position by expanding its capabilities, market reach, or resources. Acquisitions can be a quick way for companies to grow, diversify their product lines, or eliminate competition.

The Role of M&A Advisors in Successful Transactions

Navigating a merger, particularly one of near equals, requires meticulous planning and execution to realize its full potential. A trusted M&A advisory firm like Freeman Logan is crucial to navigating this complex process successfully. From performing due diligence — including quality of earnings and valuation recommendations — to developing transition and communication plans, our firm ensures that our clients achieve their strategic and financial goals.

Here is an overview of the typical merger process (for relative equals) and the mergers and acquisitions advisory firm’s role at each stage.

  • Mapping Strategic Goals and Objectives
    Both companies must be clear on their strategic goals and objectives in this early stage, including identifying complementary strengths and potential benefits of a possible merger.
  • Finding the Right Partner and Performing Due Diligence
    When identifying a company that complements or enhances the other’s strengths, an experienced M&A advisor can accelerate the process. At Freeman Logan, the breadth and depth of our professional network, combined with superior data mining, enables us to recommend and vet qualified candidates. Our team assesses both companies’ financial health, assets, liabilities, and potential risks — vital to understanding how the merger can synergistically benefit our clients. 
  • Negotiating Terms
    After due diligence, companies negotiate the specifics of the merger, including the new ownership structure, valuation, and merger agreement terms. Determining the value of each company and negotiating terms is a nuanced process. Advisory firms like Freeman Logan assist in these negotiations, ensuring a fair and equitable valuation that reflects the contributions and future potential of each company.
  • Securing Regulatory Approval
    Regulatory approval is critical to ensure legal compliance if the merger’s size or market impact is significant.
  • Developing an Integration Plan
    A detailed company integration plan is necessary to align corporate cultures and operational processes. M&A advisors help create a roadmap addressing the logistical and operational challenges of merging two entities into one cohesive organization.
  • Communication and Execution
    Clear communication is crucial to keep all stakeholders informed. Following this, the companies execute the integration plan, adjusting as needed for a successful transition. Advisory firms assist in developing and implementing communication strategies to highlight the benefits of the merger and address any concerns to maintain stakeholder confidence.

Successfully Completing an Acquisition

Though similar to mergers in some steps, acquisitions differ significantly in their focus and execution. In this process, an acquiring company takes over a target company, leading to a notable shift in control and strategic direction. Again, the expertise of a merger and acquisition consulting company is invaluable in guiding this process effectively.

  • Understanding Strategic Goals and Objectives
    Both buyers and sellers have financial and strategic goals and objectives they wish to achieve via a successful acquisition. Business owners ready to sell need a comprehensive exit strategy but may need help with execution. With over three decades of experience in the M&A space, Freeman Logan understands that selling a business is one of the most stressful yet rewarding financial events in an owner’s life. We focus solely on lower-middle market companies, taking the time to understand our client’s unique goals and objectives to find the right buyer. Acquirers need a clear strategic purpose for the acquisition: to gain market share, access new markets, acquire new technologies, or reduce competition. Consulting firms assist in clarifying and solidifying these objectives.
  • Profiling Prospects
    Similar to mergers, it is time to identify potential buyers and sellers at this stage of the acquisition process. As a key advisor, Freeman Logan develops sophisticated marketing that tells our clients’ stories, attracting a vast pool of qualified buyers and securing a higher valuation.
  • Negotiating Terms
    Acquisitions involve complex legal and financial arrangements, including negotiating the purchase price, structuring the deal (cash, stock, or a mix), and minimizing performance requirements tied to compensation. Working with an M&A advisory with proven quantitative acumen and negotiation skills can help ensure a financially beneficial outcome.
  • Determining the Integration Strategy
    Similar to mergers, M&A consultants devise an integration strategy to help align business processes and integrate teams. These plans ensure the smooth transition of the target company with minimal disruption and help manage the substantial changes that often accompany acquisitions.
  • Communication Planning
    M&A advisors develop a communication plan to address the concerns of stakeholders, including employees, customers, and investors. This plan involves conveying the vision and benefits of the acquisition to all parties involved.

Post-Deal: Ensuring Success Beyond the Transaction

In both mergers and acquisitions, the transition and integration phase is critical. According to McKinsey & Company, “most leaders bring limited integration experience…boosting their integration leadership readiness is a critical success factor for pre-close integration planning, a flawless day one, and maximum value capture and integration in the first few years post-close.”

Navigating Complexities of Integration
At this stage, merger integration consultants can be indispensable. Not only does their expertise help ensure a smooth and efficient blending of companies, but the consultants can also mentor company leaders for potential future integration challenges. Fusing two corporate cultures in mergers and acquisitions requires a deep understanding of both entities to create a cohesive new organization. Integration consultants focus on assimilating the target company into the acquirer’s structure, aligning business strategies, integrating employee teams, and consolidating technologies and processes.

Strategic Planning and Execution
Consultants assist in developing a strategic integration plan that addresses both short-term and long-term goals. They ensure that the combined entity or the newly structured company post-acquisition operates effectively and capitalizes on the synergies identified.

Change Management and Communication
Effective change management is crucial in mergers and acquisitions. Consultants help craft and implement communication strategies to address the concerns of stakeholders, mitigate resistance, and foster a positive outlook toward the new changes. They play a crucial role in ensuring that employees from both companies understand the vision and objectives of the merged or acquired entity, promoting a smooth transition and minimizing disruption to operations.

“Integrations are really different. You don’t know what you don’t know. You need capabilities that you’re unlikely to have in your organization.”

Steve Kaufman, former CEO and chairman of Arrow Electronics

Furthermore, merger integration consultants do more than just facilitate the technical aspects of a merger or acquisition — they also:

  • Address the human element, focusing on maintaining morale, productivity, and retention during periods of change.
  • Help establish governance structures and leadership roles in the new or restructured organization.
  • Provide continuous monitoring and support to manage risks and capitalize on opportunities as the new entity evolves.

While some firms have dedicated merger integration consultants, Freeman Logan includes integration planning in our comprehensive suite of M&A services. Doing so allows us to deliver a cohesive and informed service throughout the entire merger or acquisition process.


Your Long-Term Success is Our Top Priority

Both mergers and acquisitions are pathways to growth and competitive advantage but necessitate different approaches, planning, and execution strategies. Your path forward should be based on your company’s strategic goals, market position, and long-term vision for sustainable growth — all areas where Freeman Logan can provide expert advice and support. Mergers and acquisitions, when executed with precision and foresight, become strategic moves that can redefine your business’s future. Let’s get started today.

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Freeman Logan 2023 Year-in-Review

2023 at Freeman Logan was anything but ordinary. We set ambitious goals, focusing on organizational growth and strategic planning. Behind the scenes, our team applied creative strategies and made bold decisions, leading to exceptional results for our clients. We forged strategic partnerships along the way, accelerating our growth and expanding our reach. As we welcome 2024, we reflect on a year that has shaped us into a leading M&A firm. Here are our 2023 milestones and our vision for continued growth in the new year.

2023 at Freeman Logan was anything but ordinary. We set ambitious goals, focusing on organizational growth and strategic planning. Behind the scenes, our team applied creative strategies and made bold decisions, leading to exceptional results for our clients. We forged strategic partnerships along the way, accelerating our growth and expanding our reach.

As we welcome 2024, we reflect on a year that has shaped us into a leading M&A firm. Here are our 2023 milestones and our vision for continued growth in the new year.


Growing our Team

This year, we welcomed Mark Sadler, a seasoned M&A expert with over 25 years in the Technology, Media, and Telecommunications sectors, to our team. Mark’s diverse experience, from global carriers to Silicon Valley tech firms, equips us to expand into high-growth areas like Managed IT Services, enhancing our service offerings.

We also brought on board a new associate whose quick mastery of the M&A landscape has ramped up our team’s capacity to take on more projects and scale our growth. 

These strategic additions have deepened our expertise and broadened our reach in the evolving M&A market.


Executing our Strategic Vision

Throughout 2023, we held strategic planning sessions to craft and refine our roadmap for the future. Each session set a course of action for every facet of our business, from marketing and business development to technology and infrastructure. 

We started by successfully updating Freeman Logan’s mission, vision, and values, ensuring they match our firm’s ethos. With an advisor from the UVA Darden Graduate School of Business, we outlined a bold three-year growth strategy and developed comprehensive resources to guide our clients.

On the technology front, we began an exciting overhaul of our website (coming soon!) and customized our CRM to align with new outreach campaigns. We also partnered with a marketing agency to help extend our reach where we’ll have the most significant impact. Every strategic session in 2023 was a step toward executing our plan and laying a solid foundation for the future.

As a mergers and acquisitions consulting firm focused on small to mid-sized companies, we adapt our strategies and solutions to our clients’ evolving needs, effectively providing the agility necessary to navigate changing circumstances.


Delivering Client Excellence

Our dedication to client success has been the cornerstone of our operations. This year, we managed the buyer search for a €1 billion European software giant, a responsibility that speaks to our reputation and expertise. We also secured a 40% premium on the sale of a specialty consulting firm and successfully navigated the sale of a top-tier design/contractor business in the home services sector.

We revamped our customer journey, ensuring every touchpoint aligns with our firm’s values. We also crafted valuable resources like exit assessments and buyer compatibility profiles, providing our clients with innovative solutions to manage and succeed in complex transactions effectively.


Amplifying our Presence

To expand our brand and extend our reach, we partnered with marketing firm O2 Lab. They’ve been instrumental in developing our content and social media strategy and orchestrating our website’s redesign and subsequent 2024 launch. 

O2 Lab’s expertise has also been vital in elevating our presence at industry conferences and helping to position us as trusted advisors and thought leaders in the M&A space. Business Management Review included Freeman Logan on its Top 20 M&A Consulting Firms – 2023 list. This recognition highlights Freeman Logan’s unwavering commitment to excellence and our consistent delivery of top-tier advisory services. It’s a recognition that speaks volumes about our expertise, approach to client service, and innovative strategies in navigating the full spectrum of M&A activities.

Heading into 2024, we’re developing strategic partnerships to enhance our referral business and widen our market reach. These alliances allow us to tackle more complex deals and diversify our service offerings. With these targeted marketing strategies and strategic partnerships, we’re amplifying the impact we deliver to our clients.

Freeman Logan at the Channel Futures MSP 501 awards ceremony in October 2023.

Mentoring Future Leaders

Personally, I had the privilege of mentoring the next generation of business leaders, as an alumni of the UVA Darden Graduate School of Business. This experience was both humbling and invigorating, reminding me of the power of mentorship and our responsibility to shape the future of the M&A industry.


Looking Ahead

I would like to extend our deepest thanks to our team, clients, and partners for a year filled with strategic triumphs and client successes. Our firm’s vision is focused and clear as we head into the 2024 economic landscape. The groundwork we’ve laid this year expertly positions us to guide clients through their most significant transformations.

Freeman Logan wishes you a prosperous and Happy New Year!

Russell Logan
Co-Founder, Freeman Logan
LinkedIn


At Freeman Logan, our expertise guides small to mid-sized companies through their most pivotal transformational endeavors. Whether navigating the complexities of an ownership exit, orchestrating a strategic acquisition, or steering a major organizational overhaul, our mergers & acquisitions advisory team is adept at leading the charge.

We offer a comprehensive suite of mergers and acquisitions consulting services tailored to the unique needs of middle-market companies, entrepreneurs, private equity firms, and women-owned and minority-owned businesses. Our offerings span the full spectrum of M&A activities, encompassing everything from identifying potential targets or partners and marketing to providing thorough valuation, due diligence, and negotiation support. 

We aim to ensure your journey through the M&A process is seamless, strategic, and successful, and we invite you to share your 2024 goals today.

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Key Trends in Mergers & Acquisitions for 2024

As we embrace 2024, dynamic economic trends in the United States will continue to shape the mergers and acquisitions landscape. The influence of fluctuating interest rates is pivotal, serving as both a catalyst and a checkpoint for M&A activities. We believe the coming year will be characterized by a trend of cautious buyer behavior, reflecting a more nuanced and strategic approach toward investments, especially in technology, healthcare, AI, and other rapidly evolving sectors. In parallel, there is pent-up demand for deals, spurred by substantial capital reserves waiting on the sidelines. 

As we embrace 2024, dynamic economic trends in the United States will continue to shape the mergers and acquisitions landscape. The influence of fluctuating interest rates is pivotal, serving as both a catalyst and a checkpoint for M&A activities. We believe the coming year will be characterized by a trend of cautious buyer behavior, reflecting a more nuanced and strategic approach toward investments, especially in technology, healthcare, AI, and other rapidly evolving sectors. In parallel, there is pent-up demand for deals, spurred by substantial capital reserves waiting on the sidelines. 

Against the backdrop of increased regulatory scrutiny and a U.S. Presidential election, all of these factors collectively paint a complex 2024 M&A picture — where opportunities are abundant yet intricately tied to the broader economic pulse. Our exploration delves into these top projections to help guide small and mid-sized companies through the complexities of this evolving market. Here are the key trends in mergers and acquisitions for 2024.


Optimistic Economic Outlook Fuels M&A Activity

A key driver of M&A activity is the overarching economic environment, which includes factors like Gross Domestic Product (GDP) growth, inflation rates, and fiscal policies. Next year, we anticipate stronger M&A activity than in 2023, bolstered by the continued strong economic growth that has been a hallmark of the Biden-Harris economic agenda

GDP growth is a crucial component, as it often signals overall economic health and business confidence, which are essential for robust M&A activity. According to the most recent U.S. Bureau of Economic Analysis (BEA) release, GDP “increased at an annual rate of 5.2 percent in the third quarter of 2023” — the fastest pace of expansion we’ve seen since the end of 2021. Furthermore, “profits increased 3.3 percent at a quarterly rate in the third quarter.”

When GDP rises, companies tend to have better financial performances and more optimistic outlooks, making them more willing to engage in acquisitions or seek mergers. Interest rates and inflation, however, also significantly factor into the outlook equation. 

  • High interest rates increase the cost of borrowing; expensive financing can lead to fewer leveraged buyouts and make acquisitions less attractive or feasible, especially for companies with limited cash reserves. 
  • Similarly, while moderate inflation can indicate a growing economy, high inflation may lead to increased borrowing costs, which can impact the affordability of financing M&A transactions. 
  • Higher interest rates also depress valuation multiples, leading to higher discount rates and, therefore, lower valuations, which could influence buyers and sellers in lower middle market M&A. Conservative investment strategies and reduced risk-taking are also byproducts of higher interest rates. 

However, the tide is turning. In December 2023, the Federal Reserve kept its key interest rate unchanged and forecasted three cuts in 2024. Furthermore, the Biden administration’s policies to manage inflation — consumers anticipate a 3.1% annual increase in prices over the next year, marking the lowest expected rate since March 2021 — while fostering economic growth could create a balanced environment conducive to M&A. Tax incentives and government spending in certain sectors, technology or green energy, for example, may also spur acquisitions as companies seek to capitalize on these trends.

“52% of U.S. CEOs plan M&A over the next 12 months, considerably higher than our global survey, which finds only 35% planning deals. In addition, 58% of CEOs plan to divest an asset in that period as leaders seek to fund capital spending in multiple areas.”

EY CEO Survey October 2023

Exercising Caution Amidst Demand, Buyers Opt for Smaller Deals

In the evolving M&A landscape, we expect buyers to exercise greater discernment in deal-making decisions. With a heightened focus on value and viability, only the most compelling sellers will likely capture significant interest. This selective approach is part of a broader shift to mitigate risks in an increasingly cautious market. As a result, we anticipate more strategically structured deals, which include:

Earn-Outs
An emphasis on earn-outs, a contractual provision that ties a portion of the purchase price to the future performance of the acquired business, will help bridge valuation gaps between buyers and sellers. For buyers, earn-outs reduce upfront cash requirements and mitigate risk. Sellers benefit from earn-outs as they offer the potential for a higher sale price, especially if they are confident in the business’s future performance. It also demonstrates the buyer’s commitment to the business’s continued success.

Discounted Purchase Prices
We also expect a rise in discounted purchase prices for all-cash deals, which provide immediate liquidity benefits to sellers while presenting a cost-effective approach for buyers. Sellers may accept a lower total purchase price in exchange for the certainty and immediacy of cash — particularly appealing in uncertain, rapidly changing markets. For buyers, offering a cash deal at a discounted price can be advantageous as it eliminates the need for complex financing arrangements and can expedite the deal process. It also avoids the uncertainties of future valuations or earn-out arrangements.

In both scenarios, the key is to strike a balance that aligns with buyers’ and sellers’ strategic objectives and risk appetites. Earn-outs and cash deals with discounted prices offer flexibility and can be tailored to suit the unique circumstances of each transaction.

Will this cautious approach be put to the test? With significant capital accumulating due to investments largely unutilized in 2023, buyers are ready for the right opportunity. As a result, a notable shift in M&A strategy is emerging in the context of the prevailing high-interest-rate environment. There is an increasing focus on smaller-scale deals, marking a strategic pivot in response to the financial landscape. Buyers, influenced by the higher cost of borrowing, are gravitating towards more modestly sized transactions. This reflects a balancing act between leveraging available capital and navigating the challenges of the current interest rate scenario.

As a mergers and acquisitions consulting firm focused on small to mid-sized companies, we adapt our strategies and solutions to our clients’ evolving needs, effectively providing the agility necessary to navigate changing circumstances.

“It’s easier to have a buy versus build, plug-and-play type transaction in the middle market than it is in very large deals. Middle-market deals can be less exposed to leverage and can represent more of a strategic priority fit for many buyers in the market. As a result, we’re seeing more of these deals get done.”

 —  Christopher Keefe, chair of Nixon Peabody’s business & finance department

Increasing Regulatory Scrutiny May Hinder Large M&A Activity 

Next year, regulatory scrutiny, especially concerning anti-competition and national security issues, is expected to intensify, presenting a significant obstacle for large-scale M&A deals. This heightened regulatory environment also steers companies to pursue numerous smaller, more varied industry-specific M&A transactions. Such an approach not only navigates around the complexities of stringent regulations but also offers a competitive edge in the current market landscape for various reasons. 

  • In a challenging regulatory environment, betting heavily on a single large deal can be risky if regulatory approval is uncertain or if the deal faces significant delays or modifications. By spreading investments across different sectors and deal sizes, companies can mitigate the risk associated with regulatory challenges.
  • In industries related to technology, defense, or infrastructure, large deals can raise national security concerns, leading to intense scrutiny and potential rejection. 
  • In a rapidly evolving economic landscape, agility is key. Engaging in smaller transactions enables companies to pivot more easily and integrate acquisitions faster, compared to the complex and time-consuming process often involved in large transactions.
  • In a previous “big is better” era, a broad, all-encompassing approach ruled. Today, smaller, industry-specific acquisitions allow companies to target specific growth areas or capabilities. They can selectively acquire businesses that offer unique technologies, products, or market positions that align closely with their strategic objectives.

“Sharper regulatory scrutiny, which can have a chilling effect on large M&A transactions, can also create a competitive opportunity for enterprises best positioned to complete a higher volume of smaller deals.”

—  Chris Ganly, VP Team Manager at Gartner

Proven Process, Unlimited Potential 

Next year is poised to outpace 2023 M&A activity, driven by strong economic fundamentals fostered by the current administration’s economic policies. This environment encourages existing companies to expand through M&As and makes it attractive for new players to enter the market through strategic acquisitions.

At Freeman Logan, our expertise guides small to mid-sized companies through their most pivotal transformational endeavors. Whether it involves navigating the complexities of an ownership exit, orchestrating a strategic acquisition, or steering a major organizational overhaul, our mergers & acquisitions advisory team is adept at leading the charge.

We offer a comprehensive suite of mergers and acquisitions consulting services tailored to the unique needs of middle-market companies, entrepreneurs, private equity firms, and women-owned and minority-owned businesses. Our offerings span the full spectrum of M&A activities, encompassing everything from identifying potential targets or partners and marketing to providing thorough valuation, due diligence, and negotiation support. We aim to ensure your journey through the M&A process is seamless, strategic, and successful.

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