Just before summer, we published a midyear M&A update describing the state of the market at the time. One of our key points was that we’ve seen a flight to quality among private equity and corporate buyers: they were generally more conservative on valuations but bidding aggressively on companies with the strongest business fundamentals.
That’s still the case as we approach the end of the year. The GF Data Third Quarter 2024 M&A Report1 even notes that 40% of Q3’s PE deals were for companies with above-average financial health.
What 2025 holds
M&A activity is slowly ramping up, but we’re still a long way from the fast pace of 2021. In all candor, it may be some time to get back to that level, as this post-COVID activity was a rare season of deal euphoria. For PE, Q3 was a bit slower than either Q1 or Q2, showing that the recovery isn’t perfectly linear. PE firms are also hesitant to exit portfolio companies at lower than historical returns from companies they acquired when the economy appeared invincible, and valuations were at their peaks; this situation could be fueling some of their conservative attitude toward acquisitions as it puts pressure on fundraising and internal capacity.
We’re continuing to see a massive gap in interest between best-in-class businesses and average (or below average) performers. We’ve seen in many of our processes a feeding frenzy for letter of intent bids for these companies, including valuation estimates with market-leading EBITDA multiples (in many of our recent processes we have been told the multiples paid for these highly desirable companies were top of the market).
Furthermore, the political talk of tariffs could mean that diligence periods have the potential to get even longer. Buyers will want to understand how any tariff regime affects the profitability of potential acquisitions, such as by increasing the cost of raw materials.
One positive sign is that the Fed has started to ease interest rates and will keep doing so. This could benefit both sides of a transaction—sellers might have a slightly better chance to attract PE interest because debt is a bit cheaper for PE buyers. In addition, many corporations are flush with cash and looking to acquire companies.
But lower interest rates and eager strategic buyers don’t mean that sellers should do less prep before going to market. For the foreseeable future, due diligence will be more unforgiving than in the past, especially for companies that could be affected by threatened tariffs or are experiencing choppy financial performance.
Anecdotally, as we talk with buyers and work on our own deals, we are seeing a strengthening of M&A activity and a desire to put capital to work. We recently met with a PE partner who shared their target is to make 4–5 acquisitions per year. This year, they are at two—all this while their portfolio exits have slowed and return of capital to LPs is behind schedule. There seems to be a post-election loosening as we gain more clarity on the political environment and the expectations for the next administration. The uncertainty across various fronts (macro, geo-political, etc.), which has impeded M&A and felt constant over the past few years, now appears to be normalizing to healthier levels. We are entering 2025 with cautious optimism, anticipating that this level of market recovery will persist and be validated by Q4 M&A data.
Extra diligent due diligence
We’ve seen firsthand how grueling due diligence has become compared to even a few years ago—it’s thorough to a degree we’ve never witnessed in our two decades in operation.
Not only are buyers digging deeper, but they’re less willing to overlook any problems they identify. Buyers now commonly ask for valuation reductions or special indemnities or escrows to protect against contingent liabilities or identified issues in due diligence.
As always, the focus on high performance includes the due diligence period itself—this is part of the reason diligence is such a tough process. We’ve seen recent deals fail (luckily we later resuscitated the process!) because the target business’s performance declined at a key moment. You must be ready to maintain or improve the company’s growth while answering seemingly endless rounds of questions from the buyer.
Let data tell the story
Part of selling a business is sharing a credible growth plan with your potential buyer. But don’t expect them to take your word for it in this conservative M&A environment—you need numbers to make the “credible” part stick.
For example, sellers might include their backlog or potential upcoming contracts in their expected growth projections. But investors won’t see these things as definite growth vectors.
Expect to justify every projection with data. You must have convincing numbers showing how you’ll perform at or above expectations in every metric that’s important to your business, such as customer retention or monthly recurring revenue (MRR).
Thorough diligence prep, telling a convincing growth story—these have always been good ideas that often lead to higher valuations. Now they’re non-negotiable necessities. Keep this in mind as you ring in the new year, and it might make for a happy 2025!