Quarterly M&A & Economic Report-Private & Small Businesses Q2 Summer 2023

Compiled, edited, and written by Jim Shaub, Tennessee Business Brokers. Sources credited at end of Report.

Executive Summary for Q2 Summer, 2023 M&A Activity & the Economy 

The M&A industry has been dramatically impacted by the rise in interest rates over the last 18 months which has had a meaningful impact on the reduction of business valuations. While sellers were slow to accept lower valuations in late 2022, that began to change in Q1 2023 and has continued into Q2 with business closings up 8% YOY. Business owners seem to have a slightly positive outlook, likely driven by a belief the Fed is nearing an end to interest rate increases. There is mixed sentiment in the market as consumers’ sentiment was improving in late spring but is showing signs of turning negative.

Consumers appear to remain cautious about job security, housing costs, and disposable income. Consumer credit card debt is soaring, indicating a shortage of disposable income, while personal interest expenses will further erode their buying power. Sentiment could turn negative if the consumer’s outlook and spending do not improve, or the Fed is ambiguous. The consumer is cash flow impaired and while there was optimism in early 2023, it is hard to see it remaining positive without external encouragement from the Fed’s actions.

The Fed expressed a more cautious tone this summer relative to the spring. At a recent speech, Chairman Powell indicated an ongoing willingness to continue raising rates in order to keep inflation in check, as evidenced in September. Even though inflation continues to come down, the consensus of a recession being less likely has changed this summer with more economists raising their predictions of recession now being likely. New job creation has slowed, and more job layoffs announced which do indicate the economy is slowing, however, having raised rates so quickly to high levels, and with one to two more increases predicted, it may be too much to avoid a recession. The upcoming Presidential elections will likely cause a pause in bold moves by companies wanting to digest Washington’s and the economy’s direction.

The Real Estate industry, both commercial and residential, will continue to be a drag on the economy, likely at an increasing pace. Commercial properties, particularly the office segment, continue to be burdened with overcapacity and increasing vacancy rates. Adding to their woes is the amount of short-term floating debt on these properties, as discussed last quarter. Owners are facing refinancing their short-term loans at much higher rates often when the building’s NOIs have declined. In the residential market, 30-year home mortgage rates hit 7.18% last week, their highest level since 2001 and significantly higher than the 2.8% level in 2021. The consumer is unable to purchase new homes. With average new home prices having risen greatly over the last three to five years, coupled with higher mortgage rates, first time home buyers are all but locked out of the market. Economists do not expect the construction and related real estate sectors to provide help stabilizing the economy.

Going forward, CAUTION is likely the watchword, driven either by prudence or necessity. There is still too much uncertainty regarding a recession and where the economy will level out after the Fed’s unprecedented interest rate actions. The next couple of months will determine whether or not the Fed can engineer a “soft landing” for the U.S. economy despite all the rate hikes. For a copy of the full ten-page report and charts, please call or email Jim at jim@tennbusinessbrokers.com.