Ingram's June 2022

Thought Leader Insights: Business Succession Trends

Q&A ... W ith B ill C onway CC Capital Advisors’ managing director takes the measure of economic headwinds on M&A transaction volumes, buyer/seller dynamics and the latest trends in succession planning.

Q: We saw some pretty robust M&A activity in 2018-19, and a lot of that even carried into the pandemic, then it boomed again in 2021. But conditions have dete riorated a bit economically throughout the first half of the year; how has that affected transaction volume and interest? A: Volume was down in Q1, due some what to a hangover effect from 2021, and the elevated transaction volume. Many market participants stopped and caught their breath in Q1. There were a fair amount of deals that didn’t get done in 2021 that rolled over and were closed in Q1 2022, but to date, Q2 feels like deal flow has increased from Q1 as the market participants are back at it. M&A volume is the result of supply and demand, supply of capital looking to be deployed into the M&A marketplace, creat ing demand for companies to buy. Capital availability remains strong, and I would expect the volume of deals in Q2 to be sig nificantly above Q1. Q. What about various headwinds facing the economy, from inflation to higher interest rates or other factors? What’s been the impact on transactions, or seller interest? A: There are a lot of headwinds facing us, but there have always been headwinds of one sort or another. Inflation reared its ugly head this year, we have continued human capital challenges, supply-chain issues and interest rates moving substantially for the first time in a while. That all created more uncertainty in the market. It’s not that we can’t navigate through challenges, but when money gets more expensive, it changes the underlying economics of how a buyer evalu ates a transaction. Q: You mentioned the supply-and demand factor in deal availability. What’s happening there?

A: We are seeing a supply of capital trying to find a home, creating stronger demand for sellers to enter the market, resulting in higher valuations. There have been, and continue to be, premium valua tions associated with very squeaky-clean, well-run A-quality companies. Q: We’re guessing that a lot of com panies don’t fit that model. What’s the outlook for them? A: Sellers that are viewed as less-than A-quality companies, those that have a little more white hair, more customer concentra tion, more management challenges, and on and on, that’s where we’re seeing a little pull back. Buyers are no longer placing premium valuations on those com-panies, largely driven by higher interest costs, inflation, and other market headwinds. Q: Any sense among buyers that, if 2021 produced peak activity, that they’re getting in the game too late? A: We continue to have discussions with a number of potential sellers who are thinking about selling in the next 12, 24 or 36 months who are asking, “Have we missed the market?” Or they are debating, “The company is generating $10 million EBITDA now, on my way to $14 million in three years, but if the M&A market is valuing the company at 10x today and the market valuation in three years may be at 8x, am I better off selling now or making the investments and taking the risks to generate higher EBITDA and a higher valuation at a future date?” Q: So how is that math working out? A: The math is the simple part, given it is just math. The more challenging decision for business owners to rationalize is does the incremental investment justify and the additional risk justify a potential moderately higher valuation? These are tough decisions

to make, but our job is to present business owners with strategic options, and let them make educated decisions. Q: Any shift in where the buyer inter est is coming from, or conditions that sellers might be inclined to sell into? A: Intriguingly, we are seeing a lot more interest among sellers who want poten tial alternatives to private-equity buyers. Some business owners are more focused on preserving the legacy and ensuring a future for those who helped build the business, rather than becoming a “bolt-on” acquisi tion to a private-equity portfolio company, where the customer lists are absorbed and the employees are transitioned. Buyers who articulate a longer-term strategy and a desire to back current management and provide the resources to facilitate growth are well received by potential sellers. Q: Shifting a bit to seller demograph ics here. Baby Boomer owners continue to push past traditional retirement ages of 65 or 66—the last of that cohort is less than a decade away from that threshold. For those on the leading edge, is there any sense that if they haven’t sold now, they’re behind the curve? A: Not really. Business owners are focused on being fairly rewarded for the enterprise they have built and ensuring its future. Some owners enjoy the challenges of running and growing a business. Many boomers have worked to position them selves in more strategic roles, entrusting others with the day-to-day operational roles. Others are more actively involved in groom ing a successor, or establishing a sustainable vertical product line in order to place the company in a position of strength to enter the M&A market at a future date. The market is generally going to reward sellers for well run, quality companies.

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June 2022