Industrial Distributor M&A Pulse – Q1 2022

Middle market business owners are in a seller’s environment to consider transactions. Many acquisitive companies are sitting on strong balance sheets from a resilient period of growth and still a low-cost of capital. Asset managers are continuing to suggest alternative investment classes, such as private equity and direct middle-market lending, which increases the level of private debt available for middle market deals. This ultimately fuels the M&A market providing ample opportunities for business owner exits and transitions.

Treatment of company owned real estate in an M&A transaction has the potential to unlock incremental value. Real estate capitalization rates, used to value real estate, often differ from traditional EBITDA multiples used to value business operations. Thus, a recommendation that buyers value the real estate separately from the business operations frequently provides incremental value to sellers. Moreover, a third-party sale leaseback buyer may provide a premium value for real estate while not forcing reluctant buyers into real estate ownership; so long as a buyer agrees on long-term, mutually agreeable lease.

If you are contemplating an exit from your business, specific actions should be taken to properly prepare for a sale. Do not discount the value premium that a professional advisor can create through early preparation in a sale process. Commissioning a sell-side “quality of earnings”, developing and pursuing growth initiatives, implementing employee retention and incentive plans, among other things can help ensure an optimal transaction outcome.

Q1 2022 – Accelerated Pace Beyond 2021

Both US and Global Industrial Distribution M&A volume rose above Q1 2021 levels in Q1 of 2022. After a record-breaking year in 2021, M&A activity continues its momentum exceeding the same period last year by 69% in the US and 24% globally. Global M&A activity posted a record Q1 with 247 closed transactions, led by US M&A markets with 103 closed transactions. The strong M&A activity outlines the continued enthusiasm and motivation to complete transactions despite rising macro challenges presented to businesses, domestically and abroad. That being said, quarter-over-quarter growth is likely a result of businesses acting as a beneficiary of positive demand dynamics and owners seeking to capitalize on strong valuations.
Manufacturing sector indicators experienced another period of growth as businesses make strides to meet end-consumer demand. Housing starts and permits continue to tick higher despite relatively higher mortgage rates, as builders seek to bridge the housing supply/demand gap across the US. The ISM Purchasing Managers’ Index increased to 64.7, higher than the 2021 year-end reading of 60.5. The Industrial Production Index, which measures the real production output of manufacturing, mining, and utilities increased to 68.1, compared to the year-end 2021 measure of 64.7, further outlining the current expansion territory.

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