According to a recent survey by Grant Thornton, the majority of merger and acquisition professionals expect a surge in deal volume, especially in the technology, retail, hospitality and insurance industries.
The new survey by Grant Thornton included 44 C-suite executives, 39 private equity professionals, 40 investment bankers and 40 attorneys. Eighty-five percent of these respondents expect deal volume to stay the same or increase over the next six months.
“Private equity has significant levels of capital from recent fundraising,” says Elliot Findlay, the national managing principal of mergers and acquisitions at Grant Thornton. “The exhaustion from COVID-19 also has some private business owners saying, ‘We weathered the storm, but I don’t want to do that again — let’s take some money off the table.’”
In addition, a potential increase in capital gains taxes will likely spur private owners to close transactions before the end of 2021. According to Mr. Findlay, the changing tax landscape for capital gains has created anxiety for many private business owners — especially those that are nearing an exit in the next few years.
Another finding of the survey is that 86% of respondents indicate they expect to see valuations stay steady or increase in the next six months with high valuations driven by both the appetite for deals and the ongoing increase in special purpose acquisition companies (SPACs). Despite the SEC’s recent crackdown on SPACs, 89% of survey respondents predict the SPACs trend will continue or grow over the next year. Conversely, just 6% of respondents expect that the SPACs trend has peaked and will disappear quickly.
A rise in earnouts and disputes
The Grant Thornton survey also indicates a rise in the volume and value of earnouts — but that rise could come with some caveats. Nearly all survey respondents — a total of 94% — say they expect to use earnouts in at least 70% of their deals over the next six months.
“The volume of respondents expecting 90 to 100 percent of deals to have an earnout is staggering,” said Max Mitchell, Grant Thornton’s purchase agreement advisory leader. “If they’re right, then almost every deal will have an earnout by the end of the year.” Mr. Mitchell’s team actively advises buyers and sellers on the accounting and financial aspects of purchase agreements.
Todd Patrick, Grant Thornton’s head of valuation and modeling, believes that earnouts could be a natural response to the precariousness endured by businesses over the last 18 months. “There’s so much uncertainty in the market,” says Mr. Patrick, “and earnouts are a way to mitigate that uncertainty.”
Joining the rise in earnouts may be a rise in earnout disputes. “Sellers have been recently challenging whether pandemic-related adjustments should be made to earnout metrics,” said Charles Blank, a managing director of forensic advisory services at Grant Thornton. “Many of the disputes happening right now relate to transactions that closed before the pandemic when we did not have provisions in place addressing business shutdowns. We’re now in uncharted territory, where businesses and their leaders are trying to reconcile what impact those shutdowns should have on earnouts.”
Looking to the future
The dynamic market that we are now engaged with will, now more than ever, require active foresight and responsiveness.
“It’s certainly always been prudent to be as thorough as possible with valuations and earnout calculations,” added Mr. Findlay. “But given the evolving nature of the current market, it’s vital for all dealmakers to understand the potential volatilities of their industry. You may be well-versed in the intricacies of your business right now, but you have to develop a critical understanding of how your industry will change.”
Founded in Chicago in 1924, Grant Thornton is the US member firm of Grant Thornton International, one of the world’s largest audit, tax and advisory firms. The firm has revenues in excess of $1.9 billion and operates more than 50 offices with more than 590 partners and 8,500 employees.
For a free PDF copy of Grant Thornton’s survey results – “M&A deals and risks will keep rising” click HERE
© 2021 Private Equity Professional | September 28, 2021