Class VI recently hosted its quarterly Insights Call, an in-depth discussion of entrepreneurship and investing. In the latest installment, we covered trends in the public and private markets, the current state of dealmaking, creative M&A transaction structures, and strategic growth considerations.
You can watch the whole thing in the embedded video. In a rush? Here are some key takeaways from the presentations.
Public markets: strong performance despite economic headwinds
U.S. stocks have seen significant growth buoyed by higher corporate earnings and increased valuations. The S&P 500, for example, has seen a remarkable gain of over 45% since October 2022, driven by a 15.5% rise in earnings and a 30.5% increase in investor valuations.
We can attribute much of this growth to artificial intelligence (AI) investments, which have amplified productivity expectations across sectors. The Fed’s interest rate hikes starting in 2022 have also gotten inflation under control.
However, there are a few reasons for general caution. These include rich stock valuations without much room for further growth, a serious debt burden, and geopolitical uncertainties.
The best investment strategy remains a balanced approach: maintaining equity exposure, adding bonds for stability, and exploring alternatives like private equity. This kind of diversification offers resilience in uncertain times.
Private markets: positive momentum with emerging trends
The anticipation of easing interest rates has played a significant role in boosting M&A deal activity, making debt financing more accessible and appealing to buyers. As a result, deal values rose nearly 25% year-over-year by Q3 2024.
But private equity exits remain low. Many firms bought assets at high valuations during the low-interest-rate years and are now delaying exits to avoid losses.
Another notable trend is the popularity of growth equity deals—minority investments that offer liquidity without full buyouts—especially in the lower-middle market.
Looking ahead, further interest rate cuts should boost valuations and deal flow. Private equity exits should also increase in 2025 and 2026 as investment timelines near their ends.
M&A deal trends: innovative structures and rigorous diligence
Market conditions are making standard transactions tougher, but we’re seeing buyers and sellers find creative solutions like earn-outs and incentive equity to bridge valuation gaps.
More than ever, it’s hugely important for sellers to demonstrate reliable financials. Missing forecast targets can reduce valuations or even derail deals entirely. It also pays to address “box-checking” items well before going to market to ensure a smooth due diligence process—buyers are less forgiving than at any point in recent memory.
Our advice for sellers: be upfront and realistic in your projections, and prepare early to address inevitable buyer questions. This minimizes disruptions to ongoing business operations while undergoing due diligence.
Value creation: building a credible growth story
You can take several steps to drive a strong valuation and make your company more saleable.
Start by creating a credible growth story that highlights past successes and aligns with future goals. This gives investors confidence that your company will keep growing after they get involved.
A second step is reducing reliance on you and increasing your executive team’s role in operations. Heavy day-to-day owner involvement can reduce perceived value because buyers want to ensure a smooth transition as their leaders take the helm.
Finally, you can streamline operations and ensure your financial metrics are reliable. Focusing on these priorities may lead to more competitive offers and help you avoid last-minute disruptions during the sale process.
Final thoughts
As you can hear in the video, the panel highlighted the need for business owners to be proactive, flexible, and well-prepared. This is Class VI’s area of expertise, so reach out if you’re thinking about a transaction of your own.
