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Why 2021 was such a big year for M&A activity — and what 2022 could bring

Jan 18, 2022

The biggest year of M&A activity in the middle market has drawn to an end. Will 2022 be more of the same? Can the markets hold up to 2021’s frantic pace? Will it remain a seller’s market?

Why 2021 was such a big year

In 2021, motivated sellers were trying to beat the clock on potential changes to the capital gains tax. Not even the COVID-19 pandemic, massive spending and a weakening dollar compared to a proposed legislative change that could greatly increase the tax bill of most middle-market business owners looking to sell their business.

The last time the market saw this kind of surge was in 2012 when the estate tax exemption was set to fall from $5 million to $1 million on January 1, 2013.

Both 2012 and 2021 had similar levels of “dry powder” (i.e., uninvested dollars) from the private equity community, too. The charts below show private equity first-time fundraising activity since 2007, as well as the overhang, aka the remaining dollars in each year still to be invested. You can see that in 2011, in anticipation of looming estate tax changes and 2012 M&A activity, the private equity community saw first-time funds rush to the market and raise $38 billion — far more than the surrounding years. Those funds were rewarded by sellers coming to market before tax changes could take effect.

PE first-time fundraising activity

PE overhang

Fast forward to 2021. Dry powder reached over $1.4 trillion, and sellers again came to market spurred by looming tax changes. Note that privately held corporations also had cash ready to invest. They competed with private equity for the same quality businesses.

The impact of the COVID-19 pandemic

Many businesses have long been expecting a “silver tsunami” — when baby boomers would start selling their businesses, and the great wealth transfer and exit would happen. However, there is one factor that no one saw coming: The pandemic has driven many owners in their 40s and 50s to re-evaluate what they are doing, how they are spending their time and what really matters in life. Now, non-boomer-owned businesses are looking to de-risk, take on an equity partner, exit all together or at least entertain one of those possibilities.

What 2022 might bring

In 2021, businesses were told that going to market when there is limited supply would get them the best exit pricing. Lack of supply drives up pricing, and for the readied quality seller, selling price inflation will be a very good thing. This push, combined with the pull of potential tax increases, finally made a few take the leap to sell.

For the M&A community, 2022 is setting up to be much like 2021, with dollars ready to be spent on quality companies. You just have to get to market first. And Wipfli can help. Let us assist you with everything from planning and strategy to due diligence to negotiations. Contact us to learn more or get started.

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Michael L. Vaccarella
Partner, National Leader Private Equity & Transaction Advisory Services
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