Why does the general market environment matter?
Understanding the cyclical nature of the M&A market and the factors that influence its favorability is vital for eCommerce entrepreneurs considering the sale of their businesses. The market environment plays a significant role in determining the optimal timing and outcomes of such transactions. In the following we will show you what the current environment looks like, how the environment is expected to change in the future and what implications that has on timing your exit.
What market environment are we currently facing?
While the current M&A market may not be as favorable as it was in 2021, it is important to provide context by comparing it to historical market downturns. Consider the following data, reflecting the value of all worldwide M&A transactions in trillion USD:
2000: First Peak arose with a deal volume of 3.3 trillion USD.
2001/2002: first dip after the internet hype to 1.7 trillion USD and ultimately to 1.3 trillion USD.
2007: Total M&A transactions amounted to 4.6 trillion USD.
2008/2009: Due to the global financial crisis, M&A activity declined to 3.2 trillion USD while the aftermath of the crisis resulted in a further decrease to 2.3 trillion USD.
2015: After stagnating years in the early 2010s the market reached its all-time high from 2007 in 2015 again, with a total volume of 4.6 trillion USD.
2016: The overall market value dipped to 3.8 trillion USD and stagnated in the following years again.
2021: M&A transactions rebounded to reach staggering 5.9 trillion USD.
As in the graph below, you can observe that after peak years, a period of “plateauing” M&A activity typically occurs before reaching previous levels again.
Figure 1 Categorizations based on deal technique, industry, and acquirer business description Source: Dealogic, Bain & Company, M&A report 2023
Looking at M&A Multiples we can see that the average multiple paid decreased both after the market downturns after 1999, 2007 and 2021. According to the data published in Bains report, it took 4-5 years after 1999 and 2007 until M&A multiples reached pre-crisis levels again.
Figure 2 Median deal multiples for announced strategic deals in which valuation data was available; strategic deals include corporate M&A and PE portfolio add-ons Source: Dealogic, Bain & Company, M&A report 2023
Please bear in mind that the multiples displayed in the diagram are based on all publicly announced strategic deals with disclosed information on EBITDA and purchase price. The deals included are mostly mid/large sized deals across a wide range of industries and include a premium for strategic buyers. The 11.9x multiple stated by Bain therefore is not representative for small/mid-sized eCommerce deals. To get an idea about multiples for small sized eCommerce transactions check out our eCommerce Multiple update for Q3 2023 here: "eCommerce M&A Multiples Update Q2/2023"
How should we expect the market to develop in the near future?
Following M&A market peaks, such as those in 2007, 2015, and 2021, it is common to experience a subsequent market downturn. Historical data indicates that after such declines in deal volumes, M&A activity often remains more or less unchanged for multiple years before gradually recovering and reaching previous levels again.
According to Bain, corporations will continue to pursue mergers and acquisitions to address strategic needs for market expansion, growth, and filling capability gaps. Smaller to midsize deals are expected to be easier to complete due to lower risk, less reliance on financing, and reduced regulatory scrutiny.
Bain further expects that dealmakers will continue to be more cautious in valuations as a result of uncertainty surrounding capital costs and the macroeconomic outlook. The firm expects multiples to settle slightly below 2022 levels and remain on that level for the next couple of years. However, strategic buyers may face increased competition from financial buyers, especially private equity firms, who have significant funds available and a strong interest in acquiring desired assets.
Through our network of both strategic and financial buyers we can put pressure on interested parties leading to above average multiples.
Deal-makers are expected to approach valuations cautiously due to uncertainties surrounding capital costs and the macroeconomic outlook. Valuations are likely to settle around 9-10 times enterprise value to EBITDA, lower than the 2022 median. Private equity firms, with substantial available capital, remain resilient and are eager to pursue strategic deals. Despite economic fragility, they show a strong appetite for acquisitions and a willingness to pay for desired assets.
Similar to the industry-defining deals during the 2008-2009 downturn, companies with a strong market position, available cash, and debt capacity are well-positioned for faster and more profitable growth in the current cycle. These companies should focus on confirming their strategic M&A roadmaps, reevaluating deal models, and laying the foundation to swiftly pursue desirable targets. Cash-rich market leaders such as PEs, VCs, Corporates and some Aggregators in various sectors, particularly energy, industrials, and technology, have solid balance sheets to make significant moves. Companies with a successful track record in M&A will have an advantage in executing transformative deals.
When should you sell your business?
Considering that M&A multiples are expected to remain relatively low in the coming years, entrepreneurs considering a business sale should base their decision on a personal assessment of their business’s growth potential. It is unlikely that we will see significantly higher multiples due to a more beneficial market environment within the next five years.
To determine the optimal timing for a potential exit, consider the following factors:
Growth potentials: Evaluate the untapped growth opportunities within your eCommerce business. Assess whether you have the resources and expertise to maximize these potentials or if a new owner might be better equipped to unlock further value.
Market environment outlook: Realistically assess the market outlook for the next few years. While precise timing is close to impossible, it is prudent to anticipate relatively stable multiples. Base your decision on a careful assessment of your business’s potential and the likelihood of achieving higher multiples.
At Sellside Partners, we specialize in eCommerce M&A advisory services. We understand the complexities of the current market landscape and offer a complimentary initial consultation to eCommerce entrepreneurs considering the sale of their businesses. Contact us today for a free and confidential discussion to explore your options.
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If you are an eCommerce entrepreneur contemplating the sale of your business, our experienced team at Sellside Partners is here to guide you through the process. Take advantage of our free initial consultation, where we can discuss your unique situation, provide insights into the market environment, and help you make informed decisions. Reach out to us today to start your journey toward a successful exit.