Spring 2023 M&A Outlook: Is It the Right Time to Sell?

Are you thinking about selling your business to private equity? Wondering whether it’s a good idea in our current market? You’re asking the right questions. If you’ve been paying attention, you know that deal activity has slowed down considerably since the record-breaking highs of 2021 and the first half of 2022. Inflation, rising interest rates, and uncertain economic conditions have stalled growth in many industries, and companies that experienced brisk growth in 2021 are now leveling off or declining. In addition, valuations will most likely come down as credit tightens over the next several months.

But what does that mean for M&A? 

What’s Happening in the Market?

Despite the sluggish M&A market and global banking turmoil, there are still plenty of deals to be had for quality companies this year. Morgan Stanley notes that many companies still have relatively strong balance sheets compared with previous recessions. They predict that deal activity will ramp up again in the near future, especially in industries like healthcare, technology, and energy.  

The key to closing a successful deal this year will be timing, timing, timing. Lower middle market private equity is still active, but you will need to keep a close eye on your numbers over the past twelve months as well as what’s trending in your business now in order to get a good multiple. 

Here are 5 questions to help you pinpoint your growth goals:

    • What is happening in your industry? Watch the movement in your industry to see what kind of activity is taking place. If there is a trend toward consolidation, aim to get on the front end of that trend to get the most value from your deal.


    • What direction are your revenue and EBIDTA trending? Are they growing, flatlining, or declining? Do you have a sense that these trends will continue upward, or are they beginning to plateau? Make sure you understand your trend line both historically over the past twelve months and in terms of what’s happening now, and sell your company only if growth is consistently trending upward.. If you want to go to market, you’ll need to show continued growth to get the best valuation.
    • What other market conditions should you consider? Look at both opportunities and risks in the market. If you have a lot of opportunities, you can take your time thinking about when to sell. However, if you see appreciable risks like pricing pressures, supply chain issues, disruptions in your industry, or talent shortages, these may have an adverse effect on your deal. In these cases, go to market quickly if the opportunity is right or defer until the turbulence settles.
    • Do you need to alter expectations based on the above factors? If you go to market and your numbers start to flatline or decline, you will have pressure on your multiple. If this is the case, you may need to hit pause on M&A unless you are willing to sell for less. If you are growing, however, you can still get a high multiple in a private equity deal.
    • What stage of life and business are you in? If you are still in the early stages of business or early in your career, then you may have plenty of time to wait out less-than-favorable market conditions. However, if you are nearing retirement, you may not be willing or able to wait for the tide to turn. If it looks like conditions will remain strained in your industry for the next few years, you may want to go ahead and sell.

Quality Companies Can Still Make Good Deals

The bottom line question for companies considering a sale is this: should you move ahead or should you put M&A on the shelf for now? Realistically, market conditions could deteriorate, and that may mean pushing back timelines for getting a deal done. It may also mean lower valuations in the near future

The good news, however, is that luck favors the prepared. There is still investment capital available, and private equity will always come calling for quality companies. If M&A is part of your growth strategy, it pays to be ready regardless of current market conditions.

What constitutes a quality company? It’s when you have a solid financial strategy and a good business model that consistently generates revenue and growth. Here are 4 things to consider in your company as you determine whether it’s the right time to pursue a deal:

  • Quality of Revenue  –  Does your company generate consistent, recurring revenue month over month? In good markets, many companies act as if any revenue is good revenue without focusing on gross margins or bottom line. Building a quality company, however, requires carefully assessing what revenue provides the greatest return on investment and leverages your resources most effectively. 

When was the last time you assessed the quality of your revenue? Start with these questions:

  • Can you determine which revenue streams are the most profitable by product/service, line of business, customer, etc.?
  • Do you have any revenue that is unprofitable?
  • Can you identify which sources of revenue require the most overhead and administrative work/cost?
  • Is your revenue recurring or one-time?  Do you have an opportunity to convert any of your one-time revenue to recurring?
  • Do you have the data necessary to make these decisions?  
    • EBITDA Growth – Investors look at EBITDA because it tells them whether your company is consistently generating a profit. It is a good measure of the health of the company, and it’s a key metric used in valuation. If your EBITDA is growing, that indicates long-term potential for ROI
    • Consistent Cash Flow – Investors want to see predictability in your finances, and that starts with consistent cash flow. Private equity companies are pragmatic about cash because they know that cash is a company’s most strategic asset. To ensure consistent cash flow, implement a 13-week cash flow strategy that helps you stay disciplined with cash no matter what’s happening in the market.
    • Clear Vision – Do you know what’s working and what isn’t? Do you have lines of business that aren’t profitable and should be dropped? Do you have market opportunities that you should be pursuing? A clear vision for where your business is headed will prevent you from spending too much money on opportunities that aren’t profitable.

The Bottom Line

During 2021 and the first half of 2022, businesses experienced a boom that resulted in a tidal wave of M&A deals. As activity has slowed, it’s not as easy as it was to sell. As you consider your options, focus first on building a quality business that generates consistent revenue. This will serve you well whether you plan to sell in the near term or much further down the road. 

Need help assessing and optimizing your finance function or navigating your M&A deal? That’s our jam! CFO Alliance partners with you as an extension of your team, helping you navigate each step of the M&A process from initial planning to closing and integration. Contact us today to see how we can help you get your deal across the finish line!