How to Manage Changing Market Dynamic: M&A Firms

The rapid spread of Covid-19 and its likely near-term impacts have me reflecting on our last significant downturn, and what successful M&A firms did then to manage changing market dynamics. I believe there is a blueprint for a productive M&A firm in challenging economic conditions.  

Here’s what that looks like as we all manage through this current crisis one day at a time. 

Augment How You Source Business

There are currently more middle market M&A firms than at any point in our past.  Most of these firms are industry- and geography-agnostic.  While some will always argue you should “cast a wide net”, I believe near term market conditions will augment how M&A firms source.  

Retooling sourcing and marketing efforts to focus on more 'recession proof' businesses may create opportunity.  Be proactive in these categories.   

The following are just a few examples of businesses that historically do well in down cycles:

• MSP - I.T.-focused MSPs are often the last service to be eliminated before a business shuts down for good. They provide a sticky, low churn service that most middle market businesses view as mission critical.  MSPs already trade at fairly modest multiples and will likely not be discounted significantly in a downturn.

• E-commerce - While brick and mortar retail continues to wane, E-commerce companies, with their digestible valuations, and ease of scale may provide an opportunity for M&A providers. 

• Senior Care - As the senior population in the U.S continues to grow, essential senior care will continue to face growing demand.  

• Insurance - The classic 'long term' business. Both brokers and insurers/carriers have historically performed during significant market changes.

• Repair - As consumers cut back on large purchases, repair businesses of all kinds (appliance, auto, home, etc.) will become increasingly attractive targets

CAPTARGET helps M&A firms big and small with new client sourcing work and can quickly modify your sourcing strategy to meet the changing market. 

Managing Your Current Deals 

The majority of our business is now private equity-based.  As such, we have a good deal of exposure to active buyers in the market.  Not only are our clients 'open for business' but many of them are accelerating efforts to close in process deals, and even to scale future investing activities. 

There are many thousands of committed funds that will continue to honor their mandate of deploying capital into the middle market, likely with some price adjustments along the way. Private equity has significant opportunity to profit in a downturn, and they will continue to need M&A professionals to both source and support the deal making process. 

Operating Expense Reduction

I have been advocating for the reduction of fixed operating costs for M&A firms for a decade.  The current situation only strengthens my resolve. The days of committing to long term tooling contracts, and hiring internal teams to manage your volatile deal business are gone.  

Firms like our can support all sorts of to market functions including:

• CIM development
• Prospect list research
• Financial modeling
• General analyst work

This work can be done on a project basis to ensure that you only spend money on fulfillment when it is absolutely necessary. 

I do believe the M&A services space will contract measurably in the near future.  

Those who will end up thriving will likely have reorganized their firms to take advantage of cost variable solutions. They will generally be running learner operations.  

Our firm was born out of the ashes of the Great Recession and we plan to be working with M&A professionals through this downturn and the next - if we can be of any help to any of you, please do not hesitate to reach out.