Any agency owner considering selling or buying an agency can benefit from staying informed on what is generally happening in the M&A market. As new trends emerge, M&A advisors closely monitor and stay up to date with these trends and changes. The following are some of the things that M&A firms keep an eye on when considering how the market could affect current and future deals.
Would you like to make this year your year for success in the M&A market? Contact Clare Advisors today to get started!
2021 Was a Big Year for M&A
In 2021, about $5.9 trillion worth of mergers and acquisitions were completed. Given that the highest total prior to 2021 didn’t even reach $4 trillion, 2021 was a big year. In fact, it turned out to be one of the busiest years for dealmakers with lots of players in the market.
The pandemic played a significant role in agency owners’ decisions to sell their agencies. Owning and running a business has always carried risks, but for many advertising and marketing agency owners, the pandemic brought more risk than reward. The year 2020 saw a considerable decrease in media, marketing, and advertising activity and spending. As marketing and advertising agency’s clients reduced their budgets, this translated to a loss of revenue in the marketing and advertising companies.
Back in early 2020, many deals that M&A advisory firms were in the process of were put on hold or stopped entirely as buyers stepped out of the market. Buyers’ risk tolerance was much lower during most of 2020 and didn’t begin to increase until there was clarity on the economic climate.
Because so much of the M&A activity had come to a virtual standstill in 2020, 2021 saw a lot of built-up demand. Combined with agency owners seeing this as the right time to sell their business, the stage was set for an unusually high volume of M&A activity.
If an agency owner wanted to sell in 2020, then come 2021, agency owners were more likely to want to de-risk and find a buyer that could take all of that off their hands. During the pandemic, sellers dealt with months of stress regarding remote work, working to keep employees employed, and now, trying to keep the employees from getting poached.
In addition, many of the deals that were put on hold during 2020 were un-paused and both buyers and sellers went back into the market, causing deal activity to pick up very quickly.
Potential Capital Gains Tax Changes
Capital gains taxes can have a significant impact on the M&A market if there is any uncertainty regarding tax implications, like potential tax increases. In any transaction process, your advisory team should be aware of any potential tax implications of a purchase or sale. In fact, late last year, members of the house proposed increasing the top federal rate to 25%.
This means that if a seller sells after a higher capital gains tax rate is implemented, they would have to pay more in taxes on the lump sum they received as closing consideration. If agency owners were already considering selling, new tax uncertainties may persuade them to consider selling sooner rather than later.
Right now, interest rates are relatively low. However, rates are expected to rise later this year. As with potential tax changes, agency owners who are already considering selling their business should consult with their M&A advisor to discuss the advantages of selling in the next year or so.
As interest rates increase, the cost of borrowing will become more expensive. This incentivizes buyers to also acquire agencies in the next year or so. Once interest rates have increased, buyers will likely put much more thought into what they are willing to pay to acquire an agency as financing will become more expensive. They will seek M&A advisory services to help them prepare for the agency acquisition. Price points between buyers and sellers will be more negotiated if the buyer is getting a loan from the bank to fund the transaction. Negotiating earnout payments and promissory notes will take more expertise and negotiating skills. For this reason, relying on an expert M&A advisor will be critical.
2022 Should Be a Very Active Deal Year
M&A advisory firms are expecting a very active deal year throughout 2022.
Consider the impact of special purpose acquisition companies (SPACs). These are publicly traded companies created for the purpose of acquiring or merging with an existing company. Many SPACs have a limited time to acquire companies. Generally speaking, SPACS have to give back their investors’ money if they haven’t completed the transaction within an 18-month period.
Many of these SPACs spent 2021 raising funds. Now, they are ready to find companies to acquire with the money they’ve amassed. Because they have a limited amount of time to use these funds to acquire a business, 2022 will be full of SPAC-related mergers and acquisitions. Accordingly, there will be a large pool of buyers in the market.
At the same time, advertising and marketing agency owners who went through the stress of keeping their business afloat during the pandemic may be more interested in selling during 2022. In addition, if they have put a year of solid results behind them in 2021, they are in an better position to sell this year than in the last couple of years.
With more buyers and sellers ready to enter the M&A market, 2022 will almost certainly be another big year for mergers and acquisitions. However, there will be hurdles and structural challenges to overcome. With looming higher interest rates, rising inflation, increased taxes, and greater regulation, you need the best M&A advisor to guide you and your agency through the M&A process. Now, more than ever, M&A advisory services are the key to getting the best results from your agency sale, purchase, or merger.
Your Merger and Acquisition Consultant in 2022 and Beyond
Seeking assistance from a mergers and acquisition advisor makes sense now more than ever. At Clare Advisors, we provide sell-side advisory, buy-side advisory, and a range of other financial advisory services. As your M&A advisor in DC and across the U.S., we stay informed of all the economic factors that impact the M&A market. This, along with our years of experience as an M/A firm in the advertising and marketing industry, gives us the insight needed to guide you towards the best results in your agency sale or purchase.
Our founder, John C. Burns III, has had extensive experience and success in advising clients through the buy-side and sell-side M&A process over the years. Our boutique M&A firm offers the advantages of responsive and high-quality services, especially suited to small and lower middle-market agencies.
When you need the expertise of a reputable M&A advisor, you can find it with the Clare Advisors team. We are here to help you reach the outcome you want and need in your M&A transaction. With Clare Advisors at your side, you can move forward with your M&A search and transaction confidently.
Are you ready to acquire or sell an agency this year? Call Clare Advisors to get the M&A advisory services you need now.