In what is often a fast-paced world of deals and acquisitions, it seems as if someone has hit the brakes – and deals, as a result, have been dragging. So, we ask, what is dragging deals in the current economic landscape?
1. The Need for Caution
The first culprit in this slowdown is the cautious approach investors have adopted among a volatile economy and rising interest rates. With debt becoming more expensive, investors find themselves in a bind, carefully scrutinizing potential investments to ensure they are making the right moves in a shaky market.
2. Competition and the Valuation Conundrum
Valuations have come down, but the competitive landscape has intensified. Historical middle-of-the-road companies are now being looked at more closely, making it harder to find those hidden gems. Investors are no longer rushing to seal the deal; instead, they are taking their time in an effort to get the best bang for their buck.
On the flip side, reluctant sellers are still adjusting to revised valuations… wondering if now is the right time to pull the trigger.
The fear of not getting the best deal coupled with market volatility has ultimately made them less ready to sell. And this delicate dance between buyer trepidation and seller unpreparedness has led to a standoff.
3. Thorough Vetting
In this era of uncertainty, investors are spending more time vetting operational plans, scrutinizing margins and making sure that the proposed deals hold true from every angle. The mantra is no longer ‘buy fast,’ but rather, ‘buy right.’
4. New Normal Uncertainty, yet Pressure to Deploy is Mounting
With more money in hand, there’s mounting pressure to put it to work. However, the urgency to invest is met with a cautious approach, as these investors are still struggling with what a ‘new normal’ really is. The race against time is real, but reaching a perfect intersection of buyer and seller thoughts on timing and valuation is tougher than you’d think.
5. Market Volatility and Valuation Realignment
Market shakiness and stratosphere-level valuations in recent years have made it difficult for groups to get under the Letter of Intent (LOI) quickly. The post-LOI phase involves more work, as buyers try to navigate through the uncertainties of the market.
6. Pre-LOI and Post-LOI Challenges
The challenges extend from the pre-LOI phase to post-LOI negotiations. Communication delays, extended diligence and unanswered questions create friction, leading to the dreaded drag in the closing process.
7. The Information Crunch
Buyers are becoming more discerning, asking intricate questions about raw materials, supplier details and revenue profiles. This increased scrutiny demands sellers to provide comprehensive and readily available information – a process that not only takes time but is often not as clear to sellers as it is buyers. For this reason, as soon as a buyer knocks on your door (even before!), involve your advisors to ease this process. Sellers don’t always have to be actively pursuing a sale to be approached either – and sometimes it’s beneficial to hear a buyer out.
What Can Be Done
Rather than waiting for the economy to send smoke signals regarding its plan to speed things up, or for some magic unicorn dust to sprinkle on deals to make them move along, there is something that can be done to make deals drag less: collaborate closely with your advisors.
When your advisors get involved earlier in the game (like pre-LOI stage early), buyers can gain better insights into the scope, uncover where to best invest dollars and unveil potential issues. Sellers can benefit by being in a solid position if, and especially when, the opportunity comes. Having insight as to what will be needed in a transaction and a clear picture of your earnings and financial position is crucial.
By getting advisors in early and connecting them to key people on the other side of the table, you’re also cutting out the age-old game of telephone, thus speeding up the process. Taking this step ensures communication is as seamless as possible, avoiding major silos between varying advisors (lawyers, accountants, so on) that will create issues later in the game.
Bonus points – if you can get your advisors on site for a day or two to crank through the data and requests in one sitting versus dragging it out over several weeks via phone and email, you’ll save time and frustration. On-site visits and direct communication channels are seen as essential for a smoother transaction.
The current slowdown in deals can be attributed to a mix of caution, market dynamics and an increased emphasis on thorough deal evaluation. While deals may be dragging a bit more than what we’re used to seeing, it’s a necessary adjustment to ensure that every deal is a well thought-out and strategic move in the unpredictable economic landscape. And there’s reason to believe today’s money being put to work means a fruitful future with deal activity picking up again. If you want to see your next deal get over the goal line more quickly and smoothly, be sure to enlist the help of your Sikich Transaction Advisor.
