2021 Will Be a Record Year for Middle-Market M&A, but 2022 Will Be a Better Year for Sellers

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By the end of December 2021, when all the deals are signed and the money is wired, middle-market M&A will have had a record-breaking year. There were a handful of factors that pushed the deal activity to unprecedented levels, including the pent-up activity from a depressed COVID year, the potential tax changes anticipated to be effective starting in 2022, an abundance of capital looking for investment opportunities, strong economic growth, and the continued low interest rate environment. The 2021 deal activity was so strong that it has overwhelmed many service providers (i.e. lawyers, accountants, etc). More importantly, many equity funds had to turn down attractive deal opportunities as they reached their capacity level as a result of the excessive volume. If you talk to seasoned M&A professionals, most will tell you that 2021 was as intense of a deal year as they have seen.

The factors contributing to a robust M&A environment in 2021 are also why we believe 2022 will be a better year to sell your business. The key factors which will drive a better environment for sellers in 2022 include:

  • Tax Selling Will Lessen Supply – As we get more clarity regarding U.S. tax changes, it appears that any changes to the tax rates in the U.S. will be significantly less than anticipated in 2021. The prospect of significant changes to the tax code drove many business owners to sell in 2021 to avoid higher potential tax obligations. This supply of tax-motivated selling should lessen significantly in 2022, reducing the number of deals available to potential buyers.
  • Lower Supply Will Drive More Buyers To Your Deal – Given the reduction of tax-driven deals, we believe the frenzied deal activity in 2021 will moderate into 2022. This will allow potential acquirers to have the time and capacity to review your selling material and react accordingly. In 2021, the buyer base was not able to fully participate in many deals. This will help broaden the interest in a quality company looking to sell in 2022.
  • Abundant Capital and Low Rates – Capital is still abundantly available and looking for opportunities. At the same time, interest rates remain low. This will continue to drive demand. As we enter 2022, there is a record level of private equity capital looking to be placed. As of June 2021, that uninvested amount of capital (money raised by private equity, but yet to be invested) in the U.S. hit a record high of $829 billion. This money will be placed within a 2 to 3 year period. The abundant capital with low rates will continue to drive strong multiples for M&A deals for 2022.
  • Availability Of Service Providers – While this might not appear to be a big issue, M&A deals were taking longer to get done during 2021. This is partly to do with the inability to get 3rd party service providers to free up time without lead time. Getting a “pre-sale” quality of earnings was not easy during the past year. Many firms had a 4 to 6 week wait time to perform these services. Lawyers were overwhelmed with deals, financing sources were backlogged, and other service providers were delayed. All of this extended the time in the market for many deals, which is not an ideal situation. With 2022 seeing some moderation to this frenzy, many of these delays will be lessened.
  • Economic Activity Is Still Accelerating – While predicting the economy is never an easy game, it appears that 2022 will have an accelerating economic environment. While some of this is a continuation of the rebound from the COVID slowdown, the other key benefit is the easing of the supply chain. As it stands, many businesses are running at lower levels of activity and have no inventory to utilize. As supply chain issues ease, the supply of products will grow. Combine that with the need to replenish inventory, and it will create a strong economic pull. This will help the overall M&A market and multiples, which tend to do better in strong economic environments.

While many businesses rushed to get to an exit in 2021, we believe that businesses that make the move in 2022 will reap significant benefits. These benefits will include higher multiples, more buyers pursuing a deal, and a more efficient deal process. Based on the economic environment and the other factors, 2022 appears to be a great seller’s market.

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Bob Coury

CEO & Managing Director

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