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Are Buyers Still in the Market?

We continue to believe that mergers and acquisitions will carry on once the current crisis ends.

We know this is the case based on the volume of inquiries received from private equity funds, search funds and well-funded individual buyers even during the Covid crisis. While several of our clients have temporarily closed physical operations, others are busier than ever since they are designated as providing “essential services.”

A survey we participate in offers insights. The final quarter of 2019 reveals the types of buyers in the market. This information is from MarketPulse, a survey of M&A advisors nationally compiled by Pepperdine University.

In this chart, the largest segment of buyers is existing companies – representing 40% of the fourth quarter transactions.

This means that existing companies are growing through acquisition, a trend that continues to be a major driver of transactions in the lower mid-market. In order to remain competitive, companies seek growth, and acquisitions are the quickest way to achieve it.

On the left side of the chart, two more big slices of the buyer pool are private equity funds with platform acquisitions representing 13% and “add-on” acquisitions representing 12% of transactions. A platform is a company that serves as the primary company for additional acquisitions; “add-on” transactions are made to build up the platforms.

We do not have a crystal ball about what to expect post Covid crisis.

But at last check, PE firms had undeployed capital waiting to be invested. It is generally a “use it or lose it” situation. Fortune magazine estimated $1.5 Trillion in “dry powder” was available at the start of 2020.

As for existing companies, growth through acquisition remained a major driver heading into 2020.  Time will tell if it continues, but we see reasons for believing it will.

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