August 11, 2022
By Anthony Cammarata Jr.
Whether you are currently exploring the potential of selling your business or are looking to expand through acquisition, it is important to stay apprised of the current trends in the market. All signs are pointing towards a busier second half of the year, and FCW’s Corporate and M&A team are working diligently to inform clients of developments in their field. As Q3 is already underway, below are several trends that have emerged so far this year:
Deal Volume – Coming into 2022, the outlook for M&A activity was positive, with almost 70% of dealmakers expecting M&A deal volume to continue to rise this year. While M&A activity in 2022 has shown no signs of slowing down, the overall economic outlook is generally the most significant factor in a company’s consideration of an M&A transaction. Rising inflation, ongoing supply chain disruptions, and other economic factors that the Biden Administration only appears to be making worse could depress activity moving forward. However, it is more likely that the volume of deals will remain steady while the value and composition of those deals will be changed as a result of the current economic and political climate.
Interest Rates – The Federal Reserve is expected to increase interest rates at least 6 more times before the end of the year, and officials have already signaled they are likely to raise rates by 0.75 percentage points later this month. These rate hikes could lead to a significant equity market correction with the largest risk being a U.S. recession. While we may not see a decrease in the volume of deals, the composition of deals may look a little different. We expect that as interest rates rise, so too will the number of transactions that involve mixed offerings of cash and stock. As such, it is increasingly essential for both buyers and sellers to understand the advantages and disadvantages of mixed offerings and take them into consideration when structuring a deal.
Representations and Warranty Insurance (RWI) – Representations and warranties insurance is becoming more commonplace in private U.S. mergers and acquisitions to maximize upfront value to sellers and eliminate the risk of post-closing indemnification claims, and buyers are generally expected to obtain and pay for such insurance. While RWI was more difficult to obtain last year, rates have decreased slightly in 2022 (though still around 4-5%) and slowly continue a downward trend. At the same time the number of quotes on deals is also rising. But what about claims? According to recent data, there are claims on about 20% of RWI policies. While financial statement claims are the most common, there have been recent increases in labor/employment and cyber-related claims. RWI is becoming more prevalent in the market and is even starting to become available for those engaged in lower-middle market transactions.
Private Equity Meets Small, Family-Owned Businesses – So far in 2022, there has been a stark increase in the number of transactions involving private equity firms and the acquisition of small, family-owned businesses. This trend is expected to continue as private equity funds raised a record $733 billion in 2021 and are sitting on a record $1.3 trillion of “dry powder.” The industries affected by this trend range from manufacturing to plumbing/HVAC to the services industry. Entrepreneurial sellers and small business owners are generally not professional dealmakers, and it is therefore imperative that they seek counsel from professionals to avoid being exploited by those who regularly engage in these practices. Small business owners should also seek counsel before negotiations with a potential acquirer begin so that certain steps can be taken to clean up company books and prepare their companies for sale. Failure to do so could not only lead to a slower and more cumbersome diligence process but also a much lower valuation.
If you are a business owner that is interested in selling your business or in making strategic acquisitions to grow your business, the attorneys at Flint, Connolly & Walker, LLP are prepared to provide valuable expertise and guidance as you explore your options in the current market.
Anthony Cammarata is an attorney with Flint, Connolly & Walker, LLP who represents clients on a variety of corporate and transactional matters, including mergers and acquisitions. Mr. Cammarata combines extensive transactional and litigation experience to bring a unique and versatile approach to his corporate practice of representing clients ranging from local small business owners to large multinational corporations. Mr. Cammarata also routinely works with accounting professionals and M&A consultants and advisors in connection with his transactional work.