Last year, M&A activity largely followed other business cycles, which experienced historic oscillations in response to the COVID-19 outbreak. So a white-hot start to the year came to a screeching halt in March, only to pick up some midyear as virus cases leveled out and as new pandemic protocols normalized. By the end of the year, M&A activity resembled a fairly normal year. We spotted some bargains among the transactions, but mostly we saw healthy sellers getting fair prices that ignored the pandemic, at least for the purposes of valuation.
That momentum from the end of last year, paired with increasingly positive news on virus containment, leaves us an optimistic outlook for 2021. To give a little more insight into why, here are four predictions for what we expect to see in the year ahead, both across the general market and specifically within the audiology industry.
1. Accelerated M&A Activity
Across the Market: With the way M&A activity began to heat back up at the end of 2020, we expect the full-year activity for 2021 to meet or exceed 2019 levels.
In Your Industry: In the last two years, hearing aid manufacturers haven’t acquired as many practices as they did in prior years. But more recently, we’re seeing signs of a restart in acquisition efforts. On the sell-side, a combination of factors will drive the activity. Manufacturers made very aggressive loans through the 2010s, many of which are nearing their termination dates. Further, the influx of third-party payors, the concerns over the rise of OTC, and the lingering economic and psychological impacts of the pandemic will lead an increasing number of practice owners to consider an exit.
2. Fourth-Quarter Frenzy
Across the Market: When we look at recent history, we’re confident that the new Biden Administration’s tax policy will spur sellers to act, leading to an even greater increase in deal flow in the second half of the year. There is historical precedent for this outlook. In 2012, following Barack Obama’s reelection, we saw a similar trend, as sellers worried impending tax increases would cut into sale returns. In Q4 of 2012, both Craig and Scott closed more, larger deals in tighter timelines than they otherwise would have imagined possible.
In Your Industry: We don’t see this activity limited to any one industry. Expect motivated sellers across the market.
3. Increase in New Industry Participants
Across the Market: The increasing availability of private equity capital will lead to several newly recapitalized businesses that in the years to come will be hungry for acquisitions.
In Your Industry: Right now in audiology, there’s only one prominent clinic operator backed with private equity investment, along with 1–2 smaller practices with silent partners. Private equity firms are constantly looking for hot markets, so something to keep an eye on this year is the entry of another major PE firm.
4. The Pandemic Continues to Play a Role
Across the Market: Over the course of 2020, valuations remained mostly unchanged, but due diligence did take on a new intensity. Most of this heightened scrutiny surrounded uncertainty about the permanence of a business’ recovery, risk of a future surge causing businesses to shut down again, increased expenses associated with PPE and sanitization, and questions on how to adjust the shutdown out of the P&L. At this point, most feel confident that shutdowns are a thing of the past; however, the uncertainty still plays a role.
In Your Industry: Buyers are slowly returning to the market, but we expect the pace to increase as buyers strive to take advantage of the pent-up demand for hearing aids coupled with practices as a whole returning to stability as they emerge from Covid restrictions.
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