The 2021 M&A Boom is Only Halfway Complete

Price Checking the Market Can Help Company Owners Choose the Best Path

In January, we shared our thoughts on why and how 2021 could create the Perfect Storm to Consider a Sale for company owners. We projected peak valuations in the M&A and capital markets—married with elevated recovery, tax, and business cycle risk—would provide the impetus for many to consider their strategic alternatives.

Having lived through a period of significant market turbulence, many business owners became acutely aware of how much risk they were shouldering, which opened their eyes and minds to a transaction. Midway through 2021, our thesis has borne out, translating into an M&A and capital formation boom with further room to run.

Our team has had the privilege of supporting 35 clients in M&A and capital raising efforts over the last 12 months. One might naturally attribute any year-over-year growth in 2021 to the pandemic’s temporary pause on dealmaking in 2020, but this year’s unique drivers have made it an even more active year than 2019.

Select Client Spotlights

Click through the links below to learn more about a selected grouping of the clients our team has supported in the last year. To see all of our recent transactions, click here.

White Hot Valuations for Growing Companies in Select Industries

Transaction multiples for many companies across our core growth sub-vertical coverage areas have increased materially relative to the pre-COVID environment. In many sectors, value appreciation of 20-30% is common. In some cases, it is even more elevated, especially in emerging growth sectors where first-to-market advantages and intellectual property protection are exceedingly valuable.

Companies that fared well through the pandemic and exceed the quality bar for a critical mass of counterparties are among an elite group, and the laws of supply and demand have taken hold. Private equity investors, sitting on $1.9 trillion [1] of uninvested capital, have been aggressive in attempting to outbid strategic buyers, who are often too constrained to quickly react to shifting market forces. After a pause to focus on internal operations, strategics also broadly reignited M&A efforts this spring, and the S&P 500 has $2.7 trillion [2] of cash on balance sheets.

Investors have always had robust interest in strongly performing businesses, but growth, specifically profitable growth, is even more valuable and sought-after now than it was before the pandemic. The relative value of growth has increased significantly in a market where the tide is not lifting all boats equally. Those with a compelling narrative and supporting financial performance are best positioned to maximize value in 2021.

The Tax Change Window of Opportunity

We’ve previously shared how business owners might quantify the potential tax dollars at stake in evaluating the timing of an M&A transaction this year.

Efforts to drive capital gains higher by the Democratic party have been persistent since the Obama Administration, but success has been elusive. However, all signs point toward change under the Biden administration, and many states are enacting their own forms of capital gain taxation, creating a second layer of potential burden. It is worth noting that there is no history of retroactive implementation of capital gains increases.

While the final rate of increase at the federal level may or may not be as high as the proposed 39.7%, the tax risk has not been higher in recent history, and the incremental dollars at risk have not been this elevated since the 1950s.

While this is likely not the only decision-driver for company owners, it should be on the minds of every owner as a material consideration in timing a potential transaction, given that any new paradigm is likely to persist for the next four years.

No Guesswork Required: Peace of Mind in a Market Check

In our conversations with company owners, we often hear some version of this sentence: “I hear valuations in my industry are at an all-time high and taxes may increase significantly, but what does that mean for me?”

If an owner is on the fence, how can they gauge the potential opportunity before them and determine whether this is the year? We recommend making these decisions with data, which is the basis for a ~15-30-day process we call a “Market Check.”

After some initial discovery with an owner, our team can prepare a limited scope of information to share with a thoughtfully selected group of potential buyers or investors. This surgical strike gathers real-time data to help company owners understand actual interest levels and gain more clarity around current valuation. Knowing that investors would value your company at $180m instead of $150m provides the inputs needed to evaluate the alternative option of waiting until you’ve achieved additional organic growth.

Our team conducts these checks for owners without the expectation that the owner moves forward with a transaction. This check is simply our way of helping you collect the appropriate data to inform your decision-making. Ultimately, this leads to a decision in which you can feel completely confident, even if that decision is to keep working away at your business without transacting for many years—or at all!

How Much Time is on the Clock?

There is still time to complete a transaction this year if you get the ball rolling imminently. If you are committed to closing a transaction in 2021, we would suggest you begin the process by the end of June to ensure a higher probability of closing by year-end and avoid unnecessary tax risk.

While this year’s boom has created conditions for peak valuations and a window of opportunity on the tax front, it has also caused congestion in the M&A service provider system. We’ve recently been hearing from deal lawyers and Quality of Earnings providers that they are reaching capacity for the year or are raising their rates due to supply and demand imbalances. Waiting until Q3 to begin might leave you in a service provider bind without the appropriate resources to complete the transaction.

Which Verticals are Enjoying Post-COVID Peak Valuations?

The Cascadia team has long held deep expertise and transaction experience in niche segments across a variety of industries. This focus allows us to provide the most innovative and expertise-driven service for our clients. It also enables us to align the right individuals within our networks across industries of shared focus.

In response to the changes in the market, we have doubled down on our focus on growth, and each banker has identified the most attractive sub-verticals within their industries—those experiencing high transaction activity levels and peak valuations. To see which sub-verticals our bankers have highlighted as growth areas, click here.

Learn How These Dynamics Apply to You

Our team is here to answer any questions you may have about your capital raising and M&A alternatives, whether you’re a Cascadia client or not. You can find our contact information here.

[1] Preqin (As of 5/2/2021). Retrieved from https://pro.preqin.com/
[2] Bloomberg: https://www.bloomberg.com/opinion/articles/2021-05-04/corporate-cash-grab-flashes-warning-for-bond-investors