For M&A Advisors, 2023 Starts with Hopeful Optimism


by Mark Wright

M&A advisors expect a strong start to the year, with 58% predicting an increase in middle-market deal volume in 2023. This optimism is driven by a variety of factors, including a continued decrease in valuations and an increase in the number of sellers in the market.

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As the dust settles on 2022, M&A advisors are looking at the year ahead and trying to predict how the markets will perform. Despite the headwinds of the past year, there seems to be more optimism for 2023, according to Firmex’s Q1 2023 Deal Flow Bulletin, a quarterly outlook based on proprietary data and survey responses from middle-market M&A professionals. 

As one M&A advisor noted, “there was a reset of expectations in the first half [of 2022], with a decrease in pricing that made for two slow quarters. Since then, volume has been good, even though deal size and pricing have been slightly lower.” 

Deal Volume in the Spotlight 

M&A advisors expect a strong start to the year, with 58% predicting an increase in middle-market deal volume in 2023. This optimism is driven by a variety of factors, including a continued decrease in valuations and an increase in the number of sellers in the market. 

Advisor sentiment falls right in line with Firmex’s own projections: a 17% increase in North American deal announcements and a 2% increase in European announcements in Q1 of 2023, compared to the same period in 2022. To source this data, Firmex has implemented a new artificial intelligence-based model to forecast future deal flow based on the creation and use of virtual deal rooms, along with other macroeconomic data. 

The headwinds expected this year remain similar to 2022, with rising interest rates, the possibility of a recession, and high inflation topping the list of what has M&A advisors most worried. Conversely, the impact of supply chain issues and COVID-19 have decreased over the past six months, with only 26% and 17% of advisors respectively identifying these factors as an inhibitor to deal volume. The stabilization of these external factors has allowed advisors to settle into the new market reality.   

Sector-by-Sector Sentiment 

Going beyond overall industry projections and sentiment, mid-market M&A advisor expectations for deal flow vary significantly by sector. For example, advisors remain the most optimistic about the renewable energy sector, with 63% expecting an increase in deals. This is followed by the healthcare industry, with 60% of advisors expecting an increase in deal volume – a notable uptick from the 23% of advisors that expected healthcare deals to go up a year ago. According to one M&A advisor, “green energy projects are booming. So are roll-up strategies in key markets, such as education and health.” 

Conversely, there is less optimism in the real estate and consumer/retail sectors, with only 23% and 28% predicting an increase in deal volume respectively. This may reflect concerns about rising interest rates and supply chain disruptions. Supply chain, as noted above, is less of an overall concern, but remains a significant impact on the consumer/retail sector in particular.  

Additional Numbers of Note 

Deal Volume
While deal volume is expected to pick up, valuations are not expected to follow suit. Only 21% of M&A advisors expect valuations to increase in 2023, compared to 35% in 2022. A starker comparison: 43% of advisors expect valuations to decrease, which is 20 percentage points higher than 2022. It is worth noting, though, that this is down from peak pessimism in September of last year when 52% expected valuations to decrease in Q4. 

Deal Terms
We are also seeing a greater emphasis on due diligence and risk management as deal terms are hammered out. Earn-outs are becoming increasingly common in M&A deals, particularly in the lower middle market. As one advisor stated, “we’ve found that buyers tend to adjust deal structure components (for example, earnouts, VTBs, etc.) as opposed to reducing the face value of their offers. That’s especially true in deals where the enterprise value is less than $10 million.” 

Close Rate 
Current economic conditions are making it more challenging to close deals, with 39% of advisors stating they had a below-average success rate (the portion of the deals they started working on that eventually closed) in 2022, completing an average of 63% of deals. In line with overall optimism, 58% of M&A advisors expect to increase their success rates in 2023.  

Looking Ahead 

As businesses and advisors continue to navigate a new market reality, M&A activity in the mid-market will remain a key strategy for growth and expansion. By staying up-to-date with the latest trends and insights in the M&A landscape, businesses can better position themselves for success in the months and years ahead.

Mark Wright is General Manager at Firmex