Upon reflection on the first quarter of the new year and a record-breaking 2021, we’ve seen a robust market established. Over the past several years we have seen record M&A valuations and deal volume, primarily the result of relatively stable financial markets and low-interest rates. Now, it will be interesting to see how rising interest rates and inflation impact valuations and deal volume. It will very likely cause the average multiple to come down, especially from financial buyers. At STS Capital, achieving Extraordinary Exits is defined by the business’s actual strategic value to the buyer, not simply a multiple on earnings or revenue. By selling strategically to the people that buy strategically, great companies will see results that achieve maximum results and create a lasting legacy. As we enter the second half of 2022, we are gaining a clearer picture of the remainder of the year.
Valuations will remain high, and will start to soften as rising interest rates start to take hold and impact financial buyers’ cost of debt, along with the amount of debt and the equity buyers bring to a deal. The rising US interest rates will likely reduce financial valuations due to the higher cost of debt. Whether or not interest rates affect valuations, strategic valuations will remain strong.
“With geopolitical issues currently at play, the impact is still to be fully understood. Supply chain issues and labour shortages may impact growth and profits. Therefore, businesses must secure their supply chain and strengthen their business models for resiliency as much as possible.
Other exciting things to note for this year will be businesses impacted by the “COVID bump.” Will their companies stabilise and show the “new normal” or not? Is this the actual run rate? Time will tell.” Recently noted by STS’ Andy Harris, Managing Director, who presented and guided our partners through the years insights and reflections of the past fiscal year.
As we move deeper into the year, we will likely see lower deal volume than in 2021 as buyers start integrating what they acquired in 2021 and the first half of 2022. Ultimately, great companies in the market will continue to see high demand and strategic evaluations, leading to Extraordinary Exits.
If you’re interested in these insights and learning about the opportunities available for you or other private business owners who you may know to reach their true potential value and achieve an Extraordinary Exit, please contact us via email at contactus@stscapital.com.
