How Did 2021 Change Valuations in M&A?

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Wooden blocks with percentage sign and arrow up, financial growth, interest rate increase, inflation, sale price and tax rise conceptAccording to Reuters, global M&A activity reached new highs at the end of 2021 – building on the record-breaking dealmaking streak from the beginning of the year that was aided by low interest rates and soaring stock prices.

Last year, we covered how 2020 changed valuations in M&A – from particular industries seeing far less demand, to extremely low interest rates and unusually high cash balances for PPP loan recipients. While 2020 was a strange year, so was 2021. Strange enough we felt an article on how 2021 changed valuations in M&A would be important to have as we navigate through the first half of 2022.

Change #1: labor

When we say labor, you say shortage… while the labor shortage continues, it’s crucial to discuss how this impacted valuations last year. Many businesses looked to unique ways to combat the persisting talent challenges. As companies needed people to operate – and not operating wasn’t an option – we saw an increase in add-on transactions across industries. Purchasing other companies, or merging several smaller businesses, helped leaders improve and retain their employee count.

Further, employers looked to technology to counteract the lack of human employees available to work. This included significant investments in technological and AI overhauls, as well as additional acquisitions of technology-enabled, future-focused businesses.

Change #2: inflation and supply chain

In most businesses’ books, 2020 was a “throw away” year when it came to determining an accurate valuation of your company. But what about 2021? 2021 was all about risk. We saw low interest rates but didn’t know how long that would last. And as low interest rates artificially inflate valuations, many people started off the year with some skepticism.

Inflation and supply chain shortages lingered throughout the entire year, forcing businesses to get creative. As rates rise and values erode, companies focused on ways to raise returns in a shorter time horizon to maintain valuations. 

Change #3: tax

The assumption that the Build Back Better Act would pass in 2021 weighed heavily on everyone’s minds. And while the infrastructure bill passed, Build Back Better did not. Should this Act be enacted at some point this year, it’s likely it will look entirely different than the legislation Congress attempted to push through in 2021.

M&A activity was at a high during the deliberations over the Build Back Better Act, as tax laws were expected to change. This activity promptly slowed once it became clear that the Act would not pass in 2021.

The enactment of the infrastructure bill, on the other hand, makes certain industries more appealing. Tax law changes and major investments in infrastructure create new opportunities for business activity and will inevitably reflect deals to come. Nonetheless, tax changes must always be taken with a grain of salt, since they can shift drastically depending on who controls Congress.

Moving forward

What does life look like after the pandemic subsides, and how does your company fit into that? Whether you saw increased growth or faced new challenges in 2021, this is the “new normal,” for lack of a better term, and businesses have to adapt. Certainly, valuations going forward will emphasize how your company adapted to the macroeconomic changes that the economy and merger markets now face. Valuations may look differently than we expected, but they still tell a story of your organization’s financials, management ability and confidence.

Click here for part two of this series, where we discuss our projections on what’s to come! More inflation? A possible recession? We talk all the details.

To speak with our transaction advisory services and valuation experts, contact us today:

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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