The lower middle market should continue to be a seller’s marketplace in 2019. We still have more buyers than sellers, driving up multiples and giving sellers the leverage to demand favorable terms.
One of the enduring contributors to this strong M&A cycle is the surplus of cash held by US corporations. Companies continue to hold record levels of liquid assets, reaching $2.4 trillion at the end of Q3 2018. Most industries are enjoying strong profits combined with new tax savings, and private equity firms remains aggressive buyers.
The biggest complaint we hear is that companies can’t find the talent they need to keep up with growth. But that, too, is driving companies to buy as acquisition becomes their clearest, most efficient path to growth.
Small business confidence remains strong, continuing a two-year streak of record highs according to the NFIB Small Business Optimism Index. Small business owners believe this is a good time to expand and are planning to invest in growing their businesses.
Interest rates continue to creep up but are still historically low. When I started working in the industry 20 years ago, interest rates were around 8 percent and we were busy. That tells me there’s plenty of room for interest rates to move without killing M&A.
With all the positives, this past year was relatively unprecedented, with strong activity in Main Street and the lower middle market as well as global M&A. It certainly was a record year for us at Cornerstone with around 10 deals closing in December alone—more than we sometimes closed in a whole year altogether.
And while I expect we’ll have another strong year in 2019, things could get complicated. The bull market remains the longest on record since World War II, but it may be losing steam.
In recent history, we saw strong M&A markets that lasted about two and a half years before a crash drove activity and prices downward. M&A activity started to recover in 2015, meaning we’re already at four years of a rising market, close to double historical trends of the last two decades.
Likewise, the 2020 elections are coming fast. Dealmakers may lose their rosy optimism if pro-business politicians appear to be losing favor. Based on the results of the midterms, we could be facing some significant political unknowns. Whenever there is uncertainty in the marketplace, people set M&A aside for a while and values go down.
All in all, I think sellers have another 12 to 18 months before we start to see activity dip and values soften. That doesn’t mean you have an 18-month deadline to sell—there are always groups looking to grow through acquisition—but it does mean you won’t enjoy the premiums today’s sellers are getting.
As always, the market can change on a dime. If some bubble bursts, whatever the next one might be, your value will be lower the next day. It’s not something you can predict, and there’s nothing you can do about it.
What you can do is think about how long you’re willing to hold on if the market would drop. If you intend to run your business for five or more years, you have the option of waiting for the next market cycle. But if five years is really your outside goal, you might want to take a serious look at transitioning out of your business while conditions are still at their peak.
