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M&A Outlook Bright for 2018, But Don’t Wait Too Long

Author: Gary Miller
Author: Gary Miller

As the year draws to a close, I can’t help but think about the economic outlook for mergers and acquisitions deal making in 2018. Before we discuss 2018’s economic outlook, let’s summarize 2017. Following the election of President Donald Trump and the UK’s decision to leave the European Union, 2017 has been a period of apprehension for dealmakers.

These two events caused great uncertainty about the global economic outlook and left businesses worried about the implication of other key elections in 2017, particularly those in France and Germany. However, with repeated defeats for populist politicians in Europe, business and investor confidence has increased significantly coupled with the Eurozone’s rapid recovery. Since the worlds’ economies are interdependent, the global stage is set for solid economic performance in 2018. A near record year for M&A transactions could occur.

This is a positive sign for the U.S. as the U.S. economy has its own numbers to brag about. According to Market Watch, on the one-year anniversary of Trump’s election win, the Dow Jones Industrial Average is showing its biggest post-election day gain in more than 70 years. The S&P 500 as added $2 trillion in value, up 16.3 percent since the election. The unemployment rate stands at 4.1 percent – a 17-year low. With less regulation, expanding trade deals, low-interest rates, low inflation, consistent corporate earnings increases, a rising GDP and now tax reform becoming a reality, deal making in the U.S. is set to rebound very strongly in 2018 over 2017. Deal-making could reach over $1.6 trillion in 2018 – up to $200 billion higher than in 2017 — according to multiple sources.

According to Deloitte’s fifth M&A Trends Report, about 68 percent of executives at US-headquartered corporations and 76 percent of leaders at domestic-based private equity firms say deal flow will increase in the next 12 months. Further, Deloitte reports that leaders see both the number of deals and the size of those transactions increasing significantly.

However, it is important to realize that the significant growth that we have seen in the markets to date is concentrated in two major sectors: technology and financial services. While other sectors such as healthcare, telecommunication, consumer and business services, and manufacturing are all expected to increase next year, there are wider differences among expert’s predictions.

So what does this mean for lower middle market and small-business owners? According to the 13 Annual, M&A Outlook Survey released by the law firm Dykema, respondents were bullish on the prospects of a strong M&A market. For example, over 70 percent of the respondents predict that the volume of small deals (under $50 million) will increase over the next 12 months. Sixty-eight percent of respondents said they would be involved in an acquisition in the next 12 months. An astonishing 80 percent of respondents expect an increase in M&A activity involving privately owned business in the next 12 months – increasing by 10 percent from last year’s results. According to Jeff Gifford, co-leader of Dykema’ s M&A practice, more companies are pursuing small to middle market strategic transactions.

According to some economists and financial research firms, 2019 and 2020 will reveal a decline in M&A activity in both the number of transactions and the value of the transactions. Some economists are predicting a downturn or a mild recession as early as 2019 – more likely in 2020–2021. Therefore, 2018 through 2019 are the year’s businesses will be looking to maximize their deal structures and values in their exit strategies.

I am recommending to clients who are thinking about selling their businesses to start immediately preparing their exit strategies in this uncertain business cycle. Even though it is impossible to forecast the ups and downs of the business cycles several years ahead, even six to 12 months ahead, preparing now for a sale in 2018, 2019 or 2020 is your best strategy to maximize the value of your company.

At a minimum, clean up your books and records; secure a valuation of your company from an outside professional valuation firm; update your governance and legal documents; secure a quality of earnings report; have your last three years of financials reviewed or audited by an outside independent accounting firm; develop strategies to secure your major customers for long-term sales; develop long-term employee agreements for your most valuable personnel; and develop a three-year strategic business plan for 2018 through 2021. Taking these steps could increase the value of your company to potential buyers as much as 30 percent. Next year could be the best of your life when it comes to cashing out. Based on what we know now, you have only a two-year window to sell your company.

Gary Miller ([email protected]) is the CEO of GEM Strategy Management Inc., an M&A consulting firm advising middle-market private business owners. Read more of Miller’s blogs here.