Article December 7, 2022

What does 2023 have in store for M&A?

2021 was an incredible year for M&A. Buyers motivated by the plethora of available assets, low cost of capital and record levels of dry powder drove total deal value to record heights of $5.9 trillion.

Fast forward to the tail end of this year and it’s a very different picture. While it might well be the case that we’re seeing a reset to pre-pandemic levels and M&A activity was always going to go through a correction, there’s no doubt that the brakes are on at the top end.

So what does 2023 have in store? Rising interest rates, geopolitical tends, the specter of recession and high-inflation means ongoing an M&A correction is inevitable. However, while the outlook may be gloomy for traditional M&A, the SMB end of the market continues to present an unprecedented opportunity.

Over the next couple of decades, trillions of dollars of assets are set to be transferred as baby boomers look to retire – this has been dubbed “The Great Wealth Transfer”. While much of their wealth is held in property and pensions, it is estimated that as many as 12 million privately held businesses, valued in excess of $7 trillion, are owned by boomers. Given that two thirds of family businesses fail to survive first to second generation transfer while another 50% don’t survive the transition from second to third generation, keeping the business in the family doesn’t appear to be the best path to cement an enduring financial legacy.  As such, experts are forecasting a significant number of these businesses will be transferred to third parties.

Some private equity investors, flush with record levels of dry powder, are increasingly turning to the SMB segment to continue to grow.  Attracted by a lower risk profile and digestible equity commitments, SMB is poised for significant PE investment over the coming 24 months.

All this presents a real opportunity for the insurance industry.

Traditionally SMB sellers have faced two significant issues when looking to sell their business. First, they face significant risk post-transaction. They are required to give a broad package of representations and warranties (R&W) to buyers and if these turn out to be inaccurate, they can face large legal claims from the buyer, which can emerge up to six years after a deal closes.

Second, sellers are typically required to tie up large portions of sale proceeds in escrow which comes at a significant opportunity cost, particularly in a high inflation environment.

Whilst R&W insurance has historically provided a solution that allows parties involved in larger deals to significantly mitigate these risks, it has been unattainable on smaller transactions due to a complex underwriting process and high minimum premiums. But this has changed over the past 12 months with R&W policies now available specifically for SMB transactions.  This solution can alleviate the need for an escrow, providing tangible economic benefits to sellers, whilst facilitating a transaction with a buyer adamant to obtain fulsome indemnification for transaction liabilities.

As the introduction of these policies shift the narrative of transaction liability being a specialist class of insurance to something that is accessible, 2023 could well afford brokers with little to no experience in M&A insurance the opportunity to unlock a significant business opportunity which could help enable SMB business owners maximize proceeds from the sale of their business, whilst giving them peace of mind upon exit.

If you have any questions regarding M&A insurance for small business sellers, get in touch at tlpe@cfcunderwriting.com.