Election Year M&A – Should I Wait to Sell my Firm?
It’s 2024, which means we’ll have a 29th day of February, a Summer Olympics, and a presidential election. If you’re a business owner contemplating the sale of your firm, you may have conducted enough M&A research to know that the external sale process can take 6 to 12 months. But how does an election play into the process? What are the implications of a new congress and presidential administration when it comes to mergers and acquisitions? Should you adjust the timing of your exit strategy?
Just as the election season can be filled with surprises, upsets, and anomalies, projecting what kind of M&A dynamic will take hold during this period is far from an exact science. The economy at-large plays a significant role in deal activity, and even the best economists regularly struggle with making accurate financial predictions, whether it’s an election year or not. Factor in ongoing conflicts in Ukraine and the Middle East, an active Federal Reserve, and a pandemic not too distant in the rear-view mirror, and you’ve got your work cut out for you when trying to determine the impact of an election victory by Biden, Trump, or someone else.
The other caveat of gauging the merger and acquisition landscape in the wake of an election is that they only occur once every four years. Sure, mid-term election years can be analyzed. Still, the ability of any congress to get legislation signed into law is highly dependent on who’s sitting in the Oval Office (save for the override of a veto, which would require a rare two-thirds majority in both chambers).
Looking Back to 2020
While every presidential election is branded as “historic,” the one occurring four years ago was especially memorable because it happened amid the COVID-19 outbreak. This unprecedented circumstance makes using 2020 as a benchmark or case study challenging. Businesses were forced to close in March 2020, and deal activity across the board plummeted. Buyers backed off, unable to foresee the fate of the firms they were pursuing or what the economy would look like in the months and years to come.
As a response to a pandemic-induced recession, central banks slashed interest rates. By the end of the year, M&A activity had normalized as companies adjusted to virus precautions, anticipated vaccines, and were hopeful about COVID eventually waning. Meanwhile, strategic and financial buyers took advantage of low borrowing rates and put their cash reserves to good use, which had recently been stimulated by PPP money.
So, while the 2020 election’s effect on M&A was overshadowed by the pandemic and the government’s response, there was still a key takeaway: buyers dislike uncertainty.
Looking Back Further: 2016 and 2012
While seemingly in the distant past, the 2016 election was the last to not have an incumbent president in the running. Donald Trump and Hillary Clinton presented starkly different policy approaches. Uncertainty abounded as the two candidates ran neck and neck. Merger and acquisition activity cooled off from its prior year’s high as stakeholders didn’t know whether to anticipate tax cuts, tax increases, spending, tariffs, or, conversely, a complete lack of economy-affecting legislation due to a gridlocked Congress.
Deal volume was relatively flat during the 2012 election season compared to the prior year. It’s important to consider that M&A activity was generally muted in the years following the Great Recession of 2008-2009 as the economy gradually recovered. Some thought a win by Republican Mitt Romney, a former Bain Capital CEO, could increase deal-making activity; however, he was seldom considered the frontrunner.
Looking Beyond the Data
No organization holds a complete set of deal data for election years or any other year, so it is important to interpret any analysis with a grain of salt. For example, decreases in “mega-mergers” don’t always indicate a decrease in middle- and lower-middle-market transactions. Also, an increase or decline in overall deal volume or deal value does not tell the story of any particular market sector. Some industries may “get hot” and see increases in successful deals while M&A experiences an overall slowdown.
Newfound interest, or disinterest, in a specific industry, could result from the promises of leading presidential candidates. Think “healthcare reform” or “cracking down on big tech.” Sometimes, candidates in opposite parties may align on the same issue, driving further activity. For example, pledges to rebuild infrastructure could lead to increased interest in architecture and engineering firms capable of securing lucrative government contracts.
The Bottom Line: Look Past the Commotion
Undoubtedly, some firm owners will develop a hardened political prediction and try to craft their exit around it, whether it involves rushing to sell before the election or waiting until the dust has settled the following year. Perhaps they think Candidate A will win but cause a deep recession, or Candidate B will win and be great for the economy. There will always be competing opinions and lots of noise. So, what is the best way to process it? That’s simple: tune it out.
The most significant factors that should go into the timing of the sale of your firm are your own personal objectives and the state of the firm itself. Remember that most acquirers will want the selling principal(s) to stay on board for a multi-year transition period; if your goal is to retire in the near term, it is inadvisable to wait for the political headwinds that you perceive to be optimal. Conversely, if you have many years of work left in you and can continue growing the firm, don’t fall into the trap of “you better sell now before Candidate A gets into office, or you’ll have to wait five years.”
It’s unrealistic to time your firm’s sale to align with a specific political and macroeconomic environment. We’ve learned that buyers prefer stability over uncertainty, but the best buyers remain opportunistic. Further, buyers are wary of firms that were rushed to market or have desperate sellers. Keep the focus on the firm’s growth and your timeline rather than on outside factors.
Ensure Your Own Victory
It is often said that savvy politicians begin campaigning for the next election the day after the last one ends. While that may seem excessive, the idea is similar to a winning exit strategy for a business owner. Just like an election, a “campaign” to market and sell the business may only take a year or less, but its chance of success can greatly improve with advanced preparation. The benefits of strategically planning and positioning your firm for a future sale transcend economic conditions and political climates. If you’re interested in exploring options for future M&A activity, reach out to SN, and let’s start a conversation.
Join our upcoming webinar, AE Firm Value Drivers: The Danger of Not Knowing Your Destination, to explore further how value drivers are prioritized differently depending upon your end game.