As the slowdown in dealmaking continues, both buyers and sellers are left to consider their options moving forward during this period of extreme uncertainty and market volatility. To put the current slowdown in perspective, EY had previously forecasted M&A activity to rise by 10% this year.[1] However, they recently adjusted that outlook, saying the M&A market entered a “watchful phase” in February of this year. Their data shows a downturn in the number and total value of deals of more than $100 million. The volume of those deals dropped by 5.9 percent YoY and 19.5 percent from just January of this year, and combined deal value also fell 53 percent YoY and 34 percent from January.
Whenever we see this kind of significant pause in dealmaking, buyers typically have the advantage, but not always. There are certain dynamics that can vary based on industry, the nature of the assets, and, of course, macroeconomic factors. Below, we look at the balance of power between buyers and sellers during a slowdown and how each side can best position themselves for success when conditions improve.
Who Has the Upper Hand?
Most of the time, the buyer is going to have the upper hand in this kind of situation. When there are fewer people willing to buy, those who are can often negotiate much more favorable terms. Buyers can also be highly selective, taking their time to conduct thorough due diligence on their targets and consider all options available. When the economy is in turmoil, it can also present an opportunity for buyers to target distressed or capital-constrained businesses.
While sellers are not usually in the driver’s seat when dealmaking is lagging, there are some opportunities for them to still have leverage. This is particularly true if they have an especially unique proposition or a high-performing and proven concept. There are also some areas that tend to be recession-proof or continue to grow despite contributing economic factors. Those startups who might have the best leverage are those who are not under pressure to sell as they can either wait until deal activity picks back up or negotiate more aggressively for more favorable terms.
What Can Sellers Do Now?
When it’s slow out there, sellers should make sure their fundamentals are solid. Focusing on cash flow and operational efficiencies can help to demonstrate a strong foundation to potential buyers, as well as looking at growth strategies that can move the business forward. It is also important for sellers to look at ways they can extend their runway. When mergers and acquisitions slow down, VC funding often follows suit. This means it is critical that startups ensure they have ample capital reserves to wait out the dealmaking doldrums until more favorable market conditions emerge.
Most importantly, sellers must remain consistently deal ready. The global economic and geopolitical factors that are contributing to this downturn are shifting rapidly, and that means that there could be an uptick in deal activity at any time as trade deals are struck, the markets stabilize, or conflicts and tensions are eased. While this will not happen overnight, founders should be ready to make a move when the timing and the buyer are right. Buyers will no doubt be using this time to do their diligence, so they are ready to move fast when conditions improve and look at the kinds of strategic investments that best fit their long-term goals. Founders would be wise to establish the kinds of connections today that will allow them to execute their exit plans once deals start flowing again.
[1] https://sgbonline.com/ey-ma-outlook-signals-cautious-us-deal-market/
