We believe the small-to-midsize business mergers and acquisitions market looks positive going into 2021. 

More Clarity and Certainty 

As we put 2020 behind us, what does 2021 hold for us in the SMB M&A industry? We are now entering a new year where lockdowns give way to a vaccine, and there is more clarity around taxation, spending, and related policy from an expected divided government. These factors along with Q4 signs of substantive activity led us to believe the small-to-midsize business (SMB) mergers and acquisitions (M&A) market looks positive going into 2021. 

2021 Market Factors 

Looking at the details at the time of this writing, no one knows how to call the balance of parties at the federal level. At the congressional level it is still unclear whether the U.S. will have a Democratic or Republican Senate (many predict it will hold red in the Senate). Regardless, with a Biden-Harris Presidency, we anticipate many investors will be keen to accelerate and capture existing business advantages, since the general expectation is that soon there may be higher taxes, more regulation and more (dis)incentives for how to source labor and materials (e.g., onshore manufacturing). 

Ernst & Young Study Offers Insights 

A recent EY study polled 500 executive decision-makers to forecast how their perceptions of new U.S. leadership would drive their tax and capital allocation strategies: 

  • 79% believe that the change in presidential leadership will accelerate M&A in the near term as companies seek better terms under the old administration. Longer term, companies will seek to build joint ventures and alliances to minimize the impact of expected increases in the corporate tax rate. 
  • 64% expect an increase in domestic sourcing and production as the new administration seeks to encourage manufacturing at home, along with more infrastructure builds. This does not mean outsourcing will go away but that more onshoring will take place. 
  • 44% say that post-pandemic investments and stimulus in the economy will afford their companies growth opportunities. We expect the impact to benefit some industries more than others (see our analysis on a number of these sectors in our latest M&A SMB Market report).   

Politics aside, between the pandemic and the election cycle, it has been a wild ride. TruSight and other market watchers see some silver lining from the pandemic in the SMB market, as a result of trends to improve organizational and market performance – e.g.,  more remote work, expedited digitization, sturdier supply chains, etc.  

As a corollary to this, in our recent survey of private equity (PE) investors, we identified some ripple effects in the SMB marketplace from the pandemic. Prospective buyers – family offices, PE firms and high-net-worth investors – say they are seeing different effects of COVID on valuations, as compared to before in a number of industries where things still have to get done but in new ways. These same buyers tell us that they are also focused on using buyside firms to increase access to less-competitive acquisition opportunities. 

Looking ahead, as the “noise level” decreases, companies and markets should be able to get back to business, thanks simply to the reduction of uncertainty in waiting to see what will happen with the federal government (unpredictability is a killer). 

Our Predictions Near Term: 

  • More mergers & acquisitions as companies seek to avoid potential increases in capital gains taxes, regulation, and other factors. 
  • More sales of founder-run businesses, as some owner-sellers become more psychologically “ready to sell” than before – e.g., baby boomers whose businesses have hit the guard rails a few times as they tried to optimally time an exit and were then faced with the pandemic and an unusual post-election period. 
  • Potentially more and better capitalization if the U.S. Treasury and Federal Reserve under a new administration decide to double down on pandemic-related interest rates, lending, and loan forgiveness programs. 

In short, while we do not yet have full visibility, we are seeing anecdotal evidence that there may well be a significant pull-forward of business owners in the SMB market looking for liquidity via a sale as 2020 has them “scared straight” on the path to exits.  We expect supply to be ample in 2021. As the “forest” and “the trees” for the SMB M&A market for 2021 come into view, overall, we think the market holds a lot of promise for increased activity. 

This article was written and published with permission from www.trusightllc.com,a boutique advisory firm  offering outsourced corporate development and deal origination services to a network of private equity firms, family offices, strategic acquirers, and high net worth investors across North America for over a decade.