Northeast Ohio Deal Activity: Increased Scrutiny on Forecasts in a Volatile Market
Although many people in the M&A community like to talk about valuations in the form of multiples of EBITDA, revenue, annual recurring revenue, or other metrics, ascribing a value to an enterprise is much more complicated than multiplying a couple of metrics. Buyers try to estimate the future earnings potential of businesses by taking into consideration all aspects of the company, including product differentiation, customer base, end market trends, the strength of the management team, and numerous other aspects of the organization and the markets in which it participates. Historically, particularly for traditional manufacturing businesses with steady growth, recent sales and earnings have been viewed as the easiest and most accurate way to predict future results.
However, because companies have been operating for several years in a unique environment caused by the COVID-19 pandemic, buyers are more skeptical that recent performance is an indicator of what is to come. Across all industries, buyers are scrutinizing all forecasts much more granularly and not just those with “hockey stick growth,” in order to get comfortable that historical results over the past few years were not temporary highlights caused by unique market conditions. Instead of accepting forecasts with moderate (~5 percent) growth and consistent margins, buyers are diving deeper to understand forecasting assumptions and stress test them against worst-case scenarios.
Because of this, potential sellers must ensure that they have spent adequate time forecasting and have used data-driven assumptions and market analysis to drive projections. During buyer due diligence, sellers and their advisers should be prepared to address and explain their methodology and confidently address buyer questions and concerns. Doing so will drive buyer interest and valuation multiples.
While the primary impetus for this change in buyer perspective stems largely from the pandemic and other macroeconomic factors like interest rate increases and complex geopolitical conditions, we expect that this aspect of buyer assessment will become a regular step in the deal process for the foreseeable future.
M&A Market Activity
U.S. deal volume declined by approximately 13 percent in March 2024 as compared to the prior month, and YTD volume decreased by approximately 22 percent as compared to the prior year. That said, transaction value remains near historical highs, as private equity firms and strategic acquirers have significant liquidity and are willing to pay premiums for high-quality assets.
The Northeast Ohio M&A market saw relatively flat deal volume in March of 2024 as compared to the prior month, which continued the trend of lagging behind prior year activity. March 2024, however, saw several noteworthy transactions completed by both strategic acquirers and private equity firms. Sequoia Financial Group, Becker Pumps Corp., Park Place Technologies, Encore Wound Care, and Oatey Co. all completed strategic acquisitions, while companies like Wan Dynamics and Pandata LLC saw successful exits in the technology and data space.
Deal of the Month
The deal of the month for March 2024 in Northeast Ohio is Align Capital Partners’ acquisitions of Cost Segregation Services, Inc. and TaxIncennovations LLC to form a specialty tax consulting platform. CSSI is a national provider of cost segregation studies for commercial property owners, leveraging a robust technology-enabled service model and national network of over 300 external sales representatives to complete thousands of studies annually. The addition of TaxIncennovations expands the platform’s core service offering to include research and development tax credits and energy efficiency tax deduction consulting services.
“We are excited about the opportunity to build a diversified specialty tax services platform, capitalizing on the strong foundation built at CSSI and TaxIncennovations,” said Align Partner Matt Beesley. “Together with management, we will continue to pursue strategic acquisitions of specialty tax practices to further expand the Company’s service lines.”
Daniel Bowman is a Director with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email dan@melcap.com.
Originally published on May 1, 2024
