Mid-market M&As will remain resilient in 2023, Canada’s top advisors say

Source: Refinitiv Deals Intelligence Global Mid-Market Financial Advisory Review 2022 (CNW Group/KPMG LLP)

TORONTO — Middle-market merger and acquisition activity will remain resilient in 2023, even as the market for mega deals and initial public offerings continues to weaken, according to KPMG Corporate Finance specialists.

A growing number of retiring business owners looking to sell their businesses, combined with strategic and private equity buyers looking to deploy record amounts of capital, will keep the mid-market relatively buoyant, says Neil Blair, President of KPMG Corporate Finance, Canada’s most sought-after M&A advisory firm in 2022, according to Refinitiv.

“IPO activity and mega merger deal volume saw a significant decline last year because of unfavorable market conditions and pressure on valuations, and that trend is expected to continue this year, with a bounce back in late 2023. While the mid-market faces economic headwinds as well, it will be less affected than the mega deals market thanks to its underlying fundamentals. Even so, valuations are under pressure, so well-executed succession and transition plans will be increasingly critical for buyers and sellers in the mid-market,” Blair said.

The Canadian mid-market – defined as transactions with enterprise values ranging from US$10M to $500M – saw 2,618 deals last year, according to Refinitiv. While individually these transactions do not typically move public markets, collectively they are significant contributor to the Canadian economy, with small and medium-sized businesses employing 13.7 million Canadians and accounting for 85 per cent of the private sector labour force, according to 2021 data from Statistics Canada. An increasing number of mid-market company founders are nearing retirement age as well, with nearly half (47 per cent) of the primary decision makers between the ages of 50 to 64 and 12 per cent older than 64, according to StatCan.

“Small and medium-sized businesses contribute significantly to the job market and drive more than half of Canada’s GDP growth. For business owners who are thinking of monetizing their businesses as a pathway to retirement over the next few years, preserving their value is important not just for themselves or the business, but for the economy at large,” said Blair. “Without a well-qualified management team ready to take over a business, its future faces significant risks, and the multiplier effect of this poses an even bigger risk to Canada’s future prosperity.”

The Canadian Federation of Independent Business estimates that over the next decade, $2 trillion in assets will change hands as three quarters of business owners retire. A recent KPMG in Canada survey of 500 small and medium businesses found more than one quarter (26 per cent) of respondents have already decided to sell their businesses in the next three years, and four in 10 (42 per cent) had or planned to look at adjusting their strategies by this spring to include the sale of their businesses in anticipation of a recession.
“With the looming threat of an economic downturn and increasing headwinds impacting organic growth, management teams continue to look to acquisitions as a key growth driver for their companies. That makes it more critical than ever for buyers [and sellers] to do proper due diligence to extract the most value from a merger or acquisition,” said John Cho, National Leader of Deal Advisory at KPMG in Canada.