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How to Take Full Advantage of the Surge in Lower Middle Market Deal-Making
Overall, there has been a slowdown in M&A activity in the past couple of years, post-pandemic. After an all-time high of 42,436 transactions in 2021, valued at more than $5.6T… deal-making tumbled to 41,808 transactions valued at $4.5T in 2022. And so far, with Q2 numbers just in, it looks like 2023 is following this “downward” trajectory. This is to be expected as the market “rebalances” after the record-setting deal-making frenzy we had in 2021, which was not sustainable because the result of very special circumstances with the global shutdown in 2020… and the rush to make acquisitions when the world opened back up. What was a Seller’s market has shifted to a Buyer’s market, with asking prices and valuations dropping significantly. In the midst of all this, there is a notable trend worth keeping a close eye on. As I wrote in my previous article, M&A activity is actually projected to go up in the lower middle market. If you want to maximize your opportunity here, you should start working with an investment banker. Here is what one of these M&A pros can do for you: They help you get “your house in order”. They have a network of trusted Buyers they can access. They can really enhance your negotiations. They can tell you if you’re getting a reasonable deal. They can increase your profits on the deal. And, importantly, they help you gain value, reduce risk, and protect the deal with transactional insurance, such as a Representations and Warranty (R&W) policy or Transaction Liability Private Enterprise (TLPE) insurance. TLPE, in particular, has been taking the lower middle M&A world by storm since its introduction a few years ago. That’s because TLPE goes where traditional R&W insurance can’t which are geared towards deals generally geared towards transactions north of
M&A Trends for the Rest of 2022 and into 2023
Inflation, a rise in interest rates, and global unrest and uncertainty represent some serious headwinds for the economy right now. But the consensus, from my sources in the M&A world is that dealmaking for the lower middle market has not faltered and will not falter going into the next year. Granted there has been a decrease in the pace of M&A activity when you compare 2022 to 2021, but that’s not a far comparison, as last year we saw record-breaking deal-making thanks to pent-up demand for deals as we emerged from the pandemic. As PricewaterhouseCoopers put it in their Deals
TLPE Insurance and Non-Disclosure Policies
Transaction Liability Private Enterprise insurance (TLPE) is taking the lower middle market M&A world by storm. Unlike traditional R&W insurance, TLPE is a Sell-Side policy where the Seller, rather than the Buyer, is the policyholder. The policy is triggered when the Buyer makes a claim against the Seller. Instead of going after the Seller directly, the Buyer simply collects from the insurer. Sellers benefit from this insurance as well, with TLPE effectively reducing escrow levels in deals from 10% to 1% of the purchase price. (The cost of TLPE is only $10,000 to $20,000 per $1M in Limits.) You can
Current Trends in M&A Add-Ons
Globally, M&A activity so far has declined 23% in 2022 compared to 2021. Yes, that is a significant drop. But, as I wrote in a previous article, you must consider that 2021 was a historic record-breaking year of deal-making. So, in a sense, 2022 has been somewhat of a return to normal. That said, while worldwide M&A activity has declined, what we’ve seen in the U.S. is little or no decline in deal-making. It’s essentially “flat.” This is largely because of the increasingly common practice of purchasing “add-ons” instead of platform companies.
Legal Diligence Reports and R&W Insurance
I’m helping a first-time client place Representations and Warranty (R&W) insurance, and it’s taking a bit of hand-holding on this first go-around as we get quotes from insurers and review other elements of the process. We should all keep in mind that the primary thing Underwriters want to see is thorough due diligence. Otherwise, they are going to be a lot of exclusions in the policy.
It’s Never Too Late for TLPE
It’s Never Too Late for TLPE I was at a conference recently talking with an M&A advisor. One of his clients sold his RV park for about $10M a few months prior. But, he was getting nervous that he has money withheld from the purchase price, in escrow, in case of a breach of the purchase and sale agreement.
A Look Back at 2022 Q1 M&A Activity
As we exit the first quarter of 2022, all the buzz is around the slowdown in M&A activity. It’s true that deal activity in the beginning of 2022 is a drop from Q4 2021, as well as a drop compared with Q3, Q2, and Q1 of 2021 because there was so much pent-up activity as pandemic closures waned.
Case Study: A Strategic Buyer and TLPE Insurance
Case Study: A Strategic Buyer and TLPE Insurance It took years for Representations & Warranty insurance (R&W) to gain the trust of the M&A community. For years, lawyers argued that nothing was more sure than cold- hard cash sitting in an escrow account. But PE firms, seeing the value of R&W’s ability to successfully transfer risk at a reasonable cost propelled the use of R&W to where it’s present in far more deals than not.
D&O Liability Coverage Versus TLPE Insurance
D&O Liability Coverage Versus TLPE Insurance As I’ve written in the past, there are many founders of small- and medium-sized, privately held companies that simply don’t see the need for Directors & Officers (D&O) liability coverage. I won’t argue the merits of D&O insurance here. But, the reality is that when those owners try to sell their companies, that lack of coverage will come back to bite them.