2023 M&A Outlook

As we get further into 2023, the economy faces inflationary pressures, a declining stock market, and higher interest rates – the question remains: how do these factors impact the M&A market and deal multiples for the lower middle market?

Key Insights:

  • Higher interest rates can make it more difficult to close deals, lower investor returns, and lower valuations.
  • Inflationary pressure may lead to lower deal multiples, different payment structures, and extended deal timelines.
  • The lower middle market is resilient in an otherwise “gloom and doom” economic situation.

Inflationary Pressure Impact on M&A

The U.S. and global economy faced rapid inflationary pressures throughout 2022 and is projected to slow down but remain elevated at 6.5% in 2023[1]. Inflation, as a concept, reduces the value of money over time and increases the cost of running a business. Inherently, buyers are less willing to offer premium purchase prices in an economy facing increased inflation.

Businesses with high switching costs or strong purchasing power with their vendors are in a favorable position to weather the storm in an economy with rising inflation.

If you’re a business owner looking to transact, here are key questions to consider before going to market in an economy facing high inflation:

  • Would it be detrimental to my customer’s bottom line to switch vendors?
  • Can I negotiate favorable pricing terms with my vendors?

If your answer is yes to these questions, your business is in a favorable position for a successful transaction and deal multiple. Contrarily, if your answer is no, now might be the

time to focus on growth and value creation rather than settling for an unfavorable purchase price.

Expect Longer Deal Timelines

Because of the above factors, validating exactly how inflation might affect a particular industry or company can be uncertain, causing deal timelines to be extended during diligence. Buyers are already risk-averse; add a volatile economy to the mix, and the level of caution increases significantly.

Deal Structure and Inflation[2]

Recall that the value of a dollar is depreciated during times of inflation. Also, during times of high inflation, interest rates skyrocket. Because of these factors, buyers are less likely to offer more cash at closing. Instead, buyers may explore different types of deal structures favorable to them, such as earnouts – (contingent payments after the date of sale) based on revenue or earnings targets; seller’s notes; installment loans; or rollover equity.

Higher interest rates also yield lower deal multiples. Because the cost of financing increases, investor returns naturally decrease. In turn, buyers offer lower purchase prices to make up their return on investment.

It’s Not all Gloom and Doom for the Lower Middle Market[3]

Despite the bear trends in the public markets and increasing inflation and interest rates, the number of deals in the lower middle market M&A is expected to remain stable – if not increase. Because of the negative macroeconomic trends, buyers and Private Equity Groups (PEGs) are looking to grow via acquisition rather than organic growth – which can provide a favorable outcome for lower-middle market companies that are performing well despite poor market conditions.


[1] UN Economic Development

[2] https://cmmllp.com/effects-of-inflation-on-ma-deals/

[3] https://www.axial.net/forum/lmm-remains-resilient-in-the-face-of-recession/

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