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1st Quarter 2021 M&A Activity Increases Significantly

By Generational Equity

04/26/2021

Fortune recently published an online article that really caught my attention. Entitled, “M&A activity has spiked 94%—and this investment bank CEO sees ‘a big back half’ of 2021”, the article very clearly documents just how active buyers of businesses are right now. 

Here are a few of the key points they made in the article:

Companies are doing deals at a rapid clip so far in 2021, and some M&A veterans don't expect the flow to stall out anytime soon. During the first quarter of 2021, global mergers and acquisitions activity totaled $1.3 trillion, up 94% compared to Q1 of last year, while also booking the highest year-to-date total since 1980, according to a Refinitiv report out this week.

Dealmakers are feeling bullish as the U.S. and global economies emerge from the pandemic. And with the Biden administration looking to spend trillions of dollars more in stimulus and infrastructure spending later this year (plus a Federal Reserve that is never going to cut back), it all becomes a very conducive environment to do deals.

Based on what we have seen so far this year, Generational is also expecting to experience another record year in 2021. Through the first quarter of 2021 Generational deal teams have seen significant buyer activity and interest in our deals as evidenced by the following:

  • Generational Buyer NDA’s – UP 85% over prior year
  • Buyer Visits – UP 19%
  • Current Dual Signed LOI’s – UP 81% over prior year
  • The Dollar Amount of Dual Signed LOI’s – UP 77% over prior year

These are all significant leading deal making indicators. 

An 85% increase in our NDAs during the first quarter tells us that there is tremendous buyer activity in the market right now.

NDA = Non-Disclosure Agreement, a document you need to have any buyer sign prior to releasing your documentation to them. Confidential and proprietary information (such as historical financials and important contracts) often needs to be shared with the other party. But the path to doing so safely is making sure that the other party is bound to respect the confidential information provided and not use it to the disclosing party’s detriment.

The fact that our dual-signed LOIs are up 81% and the value of the LOIs are 77% above 2020 in the first quarter is another leading indicator of significant buyer demand.

A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. The letter outlines the chief terms of a prospective deal. Commonly used in M&A transactions, a mutually signed LOI is required before the buyer proceeds with the “due diligence” phase of an acquisition. Again, this is a critical document you need signed before you expose your business to due diligence. 

As we continue to emerge economically from the impact of the COVID-19 pandemic, it is clear that buyers will most likely ramp up their activity towards the latter half of 2021 (historically the 4th quarter is the strongest quarter of the year for M&A transactions). 

If you want to take advantage of a booming economy coupled with unprecedented buyer interest, you need to get moving now! Far too many business owners are telling themselves that they need to wait 2-3 quarters or even a year or two in order to fully re-coup the impact of the pandemic on their businesses. 

However, the reality is, a new term was coined in the professional M&A world in 2020: EBITDAC recasting. EBITDAC stands for Earnings Before Interest Taxes Depreciation Amortization and COVID. 

Historically EBITDA is the financial metric that deal makers have used to determine the true earnings of any company; recasting is the process used by professional M&A firms to restate the historical EBITDA of a firm to remove expenses not directly related to the ongoing operations of a company (excessive salaries, non-active family members on salary, perks provided to ownership, etc.) or any one time expenses that are non-recurring (costs associated with fires, theft, accidents, natural disasters, etc.).

Now deal teams and buyers are also recasting the impact of COVID as a one-time, non-recurring event. You need to be aware of this because waiting until your business fully recovers to begin your exit may not be necessary as long as you can document the impact of COVID on revenue and earnings AND highlight strategies that you implemented in 2020 that will benefit you in 2021 and beyond. Recasting is a legitimate method that will “right size” your business even before it fully recovers.

To find out how you too can benefit from the growing and expanding seller’s market, I would suggest that you need to learn as much as you can about how to grow and exit your business for maximum value by attending a Generational Growth and Exit Planning Conference. You can learn more here:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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