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Future- Proof Your Deals: Proven Strategies for Success in 2024 M&A  

In partnership with Valuation Research Corporation (VRC), this news article highlights the key trends and strategies in dealmaking. It covers topics such as enhanced financial reporting, regulatory changes, and innovative approaches to deal structures. By staying informed about these developments, M&A professionals can effectively navigate the complex M&A landscape, adapt their strategies, and make informed decisions.

Despite the lingering effects of previous years, including higher-for-longer interest rates, concerns about inflation, and economic uncertainties, deal market activity in 2024 is expected to normalize as market participants adapt to these conditions gradually. 

Regardless of recent setbacks, M&A activity in 2024 is rebounding. If interest rates stabilize and regulatory uncertainties are resolved, a more pronounced upward trend in M&A deals can be expected. 

To future-proof your dealmaking, M&A professionals can look to these proven strategies for successfully navigating 2024’s M&A landscape.  

  1. Focusing on the Deal Strategy 

Regarding deal strategy, investors have actively sought to enhance their existing portfolios by acquiring smaller companies. These add-on investments require lower cash investments, especially in the current lower-leverage environment. Interestingly, add-on acquisitions have outpaced new platform deals by a wider margin since the M&A market slowdown. 

  1. Dipping into the Deal Toolkit 

When discrepancies arise between sellers’ expectations and buyers’ interests, dealmakers turn to their customary solutions to bridge these gaps. They delve into their deal toolkits to address these challenges. Now, let’s explore these solutions. 

  • Earnouts. Contingent consideration, also known as earn-outs or contingent payments, refers to a portion of the purchase price in an acquisition that is not fixed at the time of the deal but rather depends on certain future events or outcomes. These can be linked to specific performance milestones, financial targets, or other conditions. In recent months, earnouts have become more prevalent and tend to represent a greater percentage of the purchase price. Essentially, they allow buyers and sellers to align their interests by tying part of the payment to the acquired company’s post-acquisition performance. 
  • Seller financing. Recently, an increased number of private deals have incorporated seller financing. In these transactions, business owners finance a portion of the acquisition using an unsecured, subordinated note, often at a below-market fixed interest rate. 
  • Rollover equity. In the context of uncertain markets, an increasing number of deals now incorporate rollover equity. This arrangement involves part of the seller’s consideration being provided in the form of equity in the ongoing enterprise. Buyers stand to benefit from this approach in several ways: first, it aligns their interests with management; second, it results in a smaller check size for buyers (and consequently less debt at potentially higher interest rates). Notably, rollover equity has accounted for as much as 40% of the total value of acquired companies in recent private deals. 
  1. Circumventing Blocked Exits 

Exit opportunities continue to pose a challenge for dealmakers in the current market landscape. With numerous exits facing delays, private investors are increasingly turning to dividend recapitalizations and continuation funds as viable alternatives.  

Dividend recaps offer a means to return capital to investors when immediate exits are not feasible. Likewise, continuation funds, which involve the sale of fund stakes in portfolio companies to a newly managed fund by the same GP, serve as strategic tools for private equity managers to generate liquidity for their investors amidst uncertain exit timelines. These strategies underscore the adaptability and resilience required in navigating today’s complex investment environment. 

  1. Alleviating Regulatory Pressures 

Dealmakers and market participants are always on the lookout for developments in tax and accounting treatments for both domestic and international public and private companies.

In the United States, regulatory bodies and accounting standard setters are increasingly advocating for enhanced disaggregation of financial statement data among publicly traded companies. This includes promoting more comprehensive disclosure of effective tax rates and detailed reporting at the level of individual business segments. 

In the initial quarter of 2024, the Organization for Economic Co-operation and Development (OECD) finalized rules crucial to this initiative. Corporate finance professionals are now actively integrating these changes into their strategic planning efforts, closely monitoring the enactment of corresponding statutes and regulations across different jurisdictions. 

Did you love this article? Then answer this poll question: 

Which strategy will be most crucial for navigating the M&A landscape in 2024? 

  1. Focus on Portfolio Enhancement 
  1. Utilization of Deal Toolkits 
  1. Impact of Economic Factors 
  1. Long-term Strategic Planning 
  1. Adaptation to Market Conditions 

Need more context to the choice? Find them here: 

  1. Focus on Portfolio Enhancement: How effective will acquiring smaller companies be in diversifying and strengthening portfolios amidst economic uncertainties? 
  1. Utilization of Deal Toolkits: Which tool is likely to have the greatest impact in bridging gaps between buyer and seller expectations? 
  • Earnouts (contingent payments tied to future performance)
  • Seller financing (using seller-provided financing) 
  • Rollover equity (equity in the ongoing enterprise as part of the deal) 
  1. Impact of Economic Factors: How significantly do you expect the stabilization of interest rates and resolution of regulatory uncertainties to influence the upward trend in M&A deals? 
  1. Long-term Strategic Planning: What approach are you prioritizing to future-proof your dealmaking strategies in 2024? 
  1. Adaptation to Market Conditions: How important is adaptability in your strategy to navigate the current M&A landscape? 

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Want to read more about this? We are grateful to Valuation Research Corporation (VRC)for sharing their expertise in this article. Click here. 

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