Add-Ons Expected to Drive 2021 M&A Activity

By Generational Equity


A few weeks ago, Middle Market Growth, the official online publication of the Association for Corporate Growth, published an article entitled, “Optimistic Deal-Makers Ready for M&A Activity in 2021”.

Several key points were made in the article that I thought would be good to share with business owners who may have unfortunately put their exit plans on hold because of the presumed impact of the pandemic on acquisition activity.

First and foremost, it is estimated that private equity firms had more than $1.7 trillion of dry powder at the beginning of 2021. For those of you unfamiliar with the term “dry powder”, it is referring to the amount of committed capital that equity (PE) firms have on hand or can call upon from their limited partners to make investments and acquisitions with.

This is a record amount and is significant because it is a leading indicator of just how active PE firms will be to acquire companies.

Equity firms exist to do only one thing: Earn a healthy return for their investors. The only way they can do that is by investing in businesses that match the characteristics that they are looking for. So, you might ask, “What features are PE firms looking for in their acquisition strategies?”

The answer is just about everything!

Odds are good there are multiple PE firms active in your industry looking for acquisitions that simply are good fits with the platform companies they already own.

Which brings us to the second key point of this article – PE firms plan on being very active in 2021 and add-ons will be their focus:

2021 M&A Outlook Infographic

Source: Middle Market Growth

As you can see from the chart above, 61% of the PE firms surveyed plan on actively pursuing an acquisition in 2021 and, of those, 62% surveyed said add-ons will be the driving force. Although add-on activity has been a focus for years, this is especially the case in the, thankfully, post-pandemic environment we are entering. Again, according to Middle Market News:

Deal-making in most of 2020 was largely driven by smaller transactions. During the first three quarters of the year, deals under $100 million accounted for 68.7% of all M&A activity—the highest level since 2016. Deals in the $1 billion to $5 billion range made up only 1.2% of the deal count, which is the lowest percentage for this size category since 2013, according to Pitchbook. The pandemic has led deal-seekers to scour the lower middle market for returns that may have been overlooked by other acquirers who have been priced out of the middle market, according to Pitchbook.

“You can often get better value from lower valuation add-on acquisitions in the lower middle market, which is a big driver of deal demand. Roll-ups can be a good way to increase EBITDA valuation multiples as companies grow into more competitive and higher valued market segments,” says Brett Hickey, a founder of Star Mountain Capital, a lower middle-market investment firm with private lending, private equity and secondary funds. “It’s a strategy we also use. There are many smaller, high-quality businesses that don’t want to go through the grind of another recession.

I have highlighted several key points in the segments above. First, nearly 70% of all deals in 2020 were valued BELOW $100 million. So even though the mega-deals get all the press, they only accounted for 1% of all deals last year. This trend has been growing for years and will continue in 2021.

Secondly roll-ups, which are usually part of an add-on strategy, are a tremendous avenue for professional buyers to pursue because, as pointed out, it helps platform companies gain scale as they grow and move into additional market segments. This is really important to consider as you look to grow and exit your company. Make it as profitable as possible using tactical and strategic growth plans.

Finally, and only you can answer this question: Are you prepared mentally, psychologically, and financially to endure another economic downturn in the future (one hopefully not caused by a pandemic)? For most business owners, the answer is a resounding no.

All of these factors point to a tremendous seller’s market in 2021 and beyond as buyers become even more aggressive and PE firms are forced to put $1.7 trillion dollars of dry powder to use.

But the only way you can take advantage of the pending economic recovery in the latter half of 2021, and the continued expansion of this seller’s market, is by having knowledge that you need about growing and exiting your business in an optimal fashion. And the best way to start your education process is by attending a Generational Growth and Exit Planning Conference.

These complimentary meetings are designed by entrepreneurs for entrepreneurs. We believe passionately that business owners need to be fully equipped to protect and defend their largest asset – the companies that they own.

To learn more about Generational and the services we offer to business owners, please use the following links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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