In today’s M&A environment with higher interest rates and the threat of a recession, “better” businesses see a lot of buyer interest while weaker businesses may not attract a competitive bidding process, Paul Daitz, CEO of Northern Edge Advisors, tells Mergers & Acquisitions. 

Northern Edge is a boutique investment bank solely advising private businesses in the middle market, primarily on sale and divestitures. 

“In a bull market, most companies by and large could expect reasonable buyer interest,” says Daitz. But now acquirers devote most of their energy to “higher quality businesses.” 

“Fast growing, highly profitable businesses with recurring revenue” can still fetch exit multiples close to last year’s,” adds Phil Colaco, CEO of Deloitte Corporate Finance. M&A targets with “impaired inflation costs, talent or supply chain problems” attract less than they would have 12 months ago. 

Last year, an M&A candidate that showed signs of weakness, “struggling with their own internal business, navigating supply chain problems, energy costs, workforce challenges” still might attract fifty bids, says Colaco. Now they might get five in a process that requires more intense due diligence, more time and more lenders. 

“A lot of M&A processes are getting stopped,” says Colaco. 

M&A discussions have changed this year, says Daitz. Last year, buyers and sellers needed to address the effects of Covid-19 on a business. This year, a possible recession has become an additional factor in middle market dealmaking. 

“We’re advising clients daily to focus on resilience,” says Daitz. “Sellers must demonstrate how their customer bases will be affected by a recession or the cost of gas or their mortgages.”

 -Sarah Cohen