Greater Boston has seen a concentration of merger-related activity in recent years. The drumbeat of activity is noteworthy, despite significant headwinds nationally and internationally, given the region continues to be a growth market for many industries.  

While life science companies have grabbed a lot of M&A headlines in Greater Boston, there are many business owners – of all sizes – where founders or families may be considering a sale as part of their succession planning in 2023. It is hard to judge when the time is right, but after a challenging 2022, things may be turning around in the year ahead. 

In Citizens’ 2023 M&A outlook, a survey of 400 U.S. businesses and private equity firms, respondents expect mostly positive trends in mergers and acquisitions in 2023, despite the uncertainties of the macroeconomic environment. Now in its 12th year, the survey found that companies had a more optimistic view of their own prospects than news headlines would suggest. There were also signs that the M&A environment will return to more normalized expectations and volume levels, after the highs and lows of the pandemic.  

In fact, local business leaders in the gaming, lodging and commercial real estate sectors had the most positive outlook for 2023 with 46 percent of survey respondents expecting their sector to improve, compared with last year’s survey when companies in the sector were among the most pessimistic. 

Compared to recent years, companies and private equity firms both give a slightly moderated view of valuations. Most believe valuations will stay stable or increase, while only 17 percent believe valuations will decrease. While expectations vary, nearly all sectors had an upbeat outlook with respondents only indicating a more negative valuation view of Transportation and Logistics. 

Middle-market businesses have navigated the inflationary era well. Eighty-four percent say they were able to pass some or most of their price increases on to customers, and the majority believe they’ll be able to maintain those dynamics through 2023.  

Pipeline Returns to Pre-Pandemic Level 

While confidence in company performance is solid, uneasiness around the M&A backdrop appears in other answers – such as the declining confidence about getting a deal done. 

Seller confidence remains notably below pre-pandemic levels, even though companies and private equity firms both say the market environment favors sellers somewhat. Would-be sellers may be nervous about public stock values or negative headlines around stricter financing conditions and debt-syndication issues from some 2022 mega deals. 

Despite this, the M&A pipeline has resumed: Forty percent of middle-market businesses say they are currently involved in selling activity or open to it in 2023, identical to last year and in-line with the pre-pandemic 2020 outlook. The buyer pipeline has also recovered to pre-pandemic levels with 53 percent of companies saying they are currently involved in buying activity or open to it.  

Among private equity firms who believe there will be higher deal flow in 2023, 52 percent believe it will be driven by an increase in private equity assets coming to market. Thirty-six percent say that interest rates will be lower, prompting more transactions. 

The hunt for growth continues to be a major factor for M&A activity. With markets showing signs of contraction and mis-aligned short- and long-term interest rates, middle-market companies and PE firms continue to prioritize and value growth. 

Can Interest Rates Help? 

Some buyers and sellers say rising interest rates make them hesitate to pursue M&A. However, that view is not universal. In fact, nearly half of buyers say that current financing and capital markets can aid their acquisition strategies in 2023. 

Indeed, many respondents say that current capital markets conditions make it more likely they’ll acquire another company. While interest rates moved quickly off record lows, it could be that many buyers still see current interest rates at historically appealing levels. However, buyers do acknowledge that higher rates take a bite out of prospective returns.  

The steep inflation of 2022 and rapid climb in interest rates were anything but typical, capping a pandemic era marked by shifting macroeconomic conditions. Middle-market companies have piloted their businesses through these changes and, in many cases, emerged leaner and better equipped to compete. 

In our 2023 outlook, companies and private equity firms gave the first real signals that deal activity could be settling into a more typical, post-pandemic normal. Buyer and seller pipelines have fully recovered. Deal flow expectations are solid and valuation outlooks are moderated but healthy. While there are signs that uncertainty lingers underlying these trends is the point that companies feel positive about their own performance outlooks.  

If your company is considering M&A in 2023, prepare for the possibility of stable or higher valuations. Though some macroeconomic signals look recessionary, individual companies continue to forecast solid performance. Across buyers, sellers and private equity firms, valuation outlooks are stable or higher. It is also important to be ready for a competitive deal environment when the macroeconomic backdrop stabilizes. The slower deal flow of late 2022 could reverse quickly if macroeconomic trends stabilize. 

Growth through M&A continues to be a top motivation for buyers, in Greater Boston and beyond. Companies looking to sell should keep that dynamic top of mind as they take steps to prepare their businesses for a transaction. 

Jason Wallace is head of M&A advisory at Citizens Capital Markets.