M&A Professionals on the Top Valuation Challenges for 2023

With the decline in valuations and the rise in interest rates come new challenges to M&A deal professionals. We’ve spoken to freelance M&A consultants on the challenges they see, and how they help their clients navigate the uncertainty.

The explosion of valuations just before the interest hike has led to a challenging environment – M&A consultants find themselves in-between clients who expect early 2022 valuations, and markets who are not willing to pay these prices anymore. Together with a generally cooled down M&A market, many M&A deal professionals’ client conversations have become more challenging. In this article, we’ll examine what M&A professionals feel are the biggest challenges and trends they face in 2023 – and how they should be approached.

1. Challenging Client Conversations

With private markets being hit hard across most industries, the overall market sentiment indicates that this situation likely won’t change much in 2023. But for many businesses, 2022 was a year of record profits. This volatility makes it more difficult to find the right multiple to apply for targets, says Sri Malladi, Founder and Managing Partner at Athena Consulting Partners. “It’s harder to justify and defend valuations”, Malladi says.

While the multiples are challenging to arrive at, communicating them to clients has become challenging, too. No business owner that posts record profits will be excited to hear about lower valuations.

“It’s harder to justify and defend valuations”Sri Malladi, Founder and Managing Partner at Athena Consulting Partners

But not every market is equally difficult. “While the overall situation is challenging, there is still very positive momentum for investments in the renewable energy and clean tech space”, says Sina Guenther, Freelance M&A Advisor from Bonn, Germany.

“Forward-looking market price curves can vary widely, and that has a big impact on the underlying returns of a renewable energy project”, Guenther explains. “The quality of the pipeline plays an integral part in valuation discussions, especially for platform investments.”

2. Revenue and Pipeline Gain Importance for M&A Dealmakers

Financing has become more expensive for financial sponsors, and this has a large impact on the expectations of both buy- and sell-side. But through the board, solid business models with clear paths to revenue and, in combination, strict expense control have received more focus. “We’re more conservative with our growth assumptions in 2023”, says Malladi.

Many dealmakers respond that the interest in making deals work hasn’t gone down – but getting to the goal requires more navigating and explaining to sell-side clients.

The valuation gaps that naturally occur between different market conditions and stricter cost control are an impediment, but not a showstopper, says Guenther. “Buy- and sell-side still want to make deals work.” But valuation gaps require dealmakers to find more creative solutions to come to an agreement. 

“Buy- and sell-side still want to make deals work.”Sina Guenther, Freelance M&A Advisor

3. Educating Clients is Critical

“Some of my clients had successful business years in 2022, and for them it’s hard to comprehend that valuations have decreased regardless of performance”, says Tim Mollenhauer, a Freelance M&A Consultant from Munich, Germany. “I try to educate my clients as best I can about current trends and developments, and try to actively manage their expectations.”

“Some of my clients had successful business years in 2022, and for them it’s hard to comprehend that valuations have decreased regardless of performance.” Tim Mollenhauer, a Freelance M&A Consultant

Sri Malladi faces similar issues. “I need to simplify the complexity of a valuation model enough to make it easy to understand for the sell-side client, and that can be difficult. And sometimes, I have to use the same or a subset of the analysis to make a case for the buyers, who are generally more sophisticated and also run their own valuations”, the consultant from New York says. “So my valuations have to be defensible, thoughtful, and explainable, all at the same time.”

For Sina Guenther, agreeing on a valuation is largely dependent on the market and in line with the fact that revenue and expense control receive more scrutiny. “It’s usually all about the value of the future pipeline and the quality of [renewable energy] projects. Where will PPA and wholesale market prices trend over the projection period? What’s the view on interest rates and pricing for leverage over the next couple of years? How are securities and EPC contracts priced?”.

4. But… Difficult Market Conditions Foster Good Relationships

It’s clear that the market environment in 2023 has made it more difficult to achieve valuations that satisfy both buyers and sellers. But in challenging times, good M&A advisors shine.

Valuations under pressure require advisors to explain them well, and yet make them defensible – a skill that might not have been required as much in times of higher valuations and less critical buyers and sellers.

About the author

Tobias Liebsch is Co-Founder at Fintalent.io, an M&A staffing platform with 2000+ M&A and Private Equity freelancers.