Despite inflation, interest rates, Long Island M&A activity is business as usual

Merger and acquisition activity on Long Island and throughout the United States is business as usual. This despite generationally high interest rates, with sole proprietors or family-run businesses among the biggest targets in Nassau and Suffolk counties, according to banking, accounting, and advisory experts.

The upshot: Long Island businesses may continue to attract the attention of private equity firms and other investors seeking to boost deal numbers and maintain growing annual returns.

Long Island businesses are increasingly becoming prime targets for private equity firms and other investors aiming to boost their deal numbers and annual returns. In fact, many experts predict that the rate and pace of M&A activity will pick up in the second half of this year.

“We’re moving ahead as expected, with a perceived uptick in the second half of the year, extending into early 2025,” said Rebecca O’Connell, NYC Metropolitan area president of Citizens Bank.

Despite higher-than-normal interest rates, O’Connell noted that stabilization and the potential for future cuts keep the market buoyant. Citizens Bank offers both buy-side and sell-side consulting, along with deal financing.

“The resilience of the U.S. economy during this inflationary period is driving a strong M&A market,” she said.

Earlier this year, Citizens Bank published a forecast based on a survey of 400 leaders from U.S. middle-market companies and private equity firms. The survey revealed that 52 percent saw strength in the M&A market, with nearly half of private equity firms predicting an increase in mergers and acquisitions by year’s end.

O’Connell said that the forecast continues to track.

A significant portion of M&A activity on Long Island involves family businesses. Mehmet Sengulen, managing partner of accounting firm and M&A specialist UHY Advisors’ Long Island office, cited two main reasons for this trend.

Long Island businesses with a strong customer list and a long track record in a regional market that continues to grow will get attention from investment firms and out-of-region businesses alike.

“There’s a lack of a second generation to take over businesses, and many fear that their life’s work could be lost without someone to continue it,” Sengulen said.

The result is that sole proprietors or founders in these scenarios have arrived at an exit strategy in preserving their business value through a merger or outright sale.

Meanwhile, other companies that seek to expand, acquire customers, or boost supply chains are looking for companies that are precisely in that situation.

Kyle Griffith, managing partner at The NYBB Group, pointed out that businesses related to home improvements, surveillance, security systems and home automation are particularly attractive for M&A interest on Long Island. However, he noted some businesses might need more time to solidify their financials, customer lists and growth prospects.

“Every business owner believes their company is the best thing since sliced bread. They think their company is primed for an acquisition,” Griffith said. Some are not. Having realistic expectations often means engaging an independent expert to review.

The NYBB Group specializes in M&A, providing buy-side and sell-side consulting, as well as valuation services. Third-party companies often play a crucial role in confirming the viability of a business for a deal.

Sengulen of UHY said ensuring honest value in a deal is necessary to benefit both sides in a sale or business combination. That often means an outside audit of the books to ensure cash flow, stability, and no other looming issuessuch as accounting or tax issuesthat could hurt prospects for a deal.

“We conduct thorough due diligence to ensure that a business’ claimed earnings are accurate,” Sengulen explained. “If a business promises $10 million in earnings, we verify that those earnings are real.”

Advisory firms, including banks, consultant, and accountants, are essential in preparing businesses for M&A and guiding them through the process.

“Engaging with an M&A advisor to understand the process and key considerations is crucial,” said Citizens Bank’s O’Connell. “Businesses should explore what the M&A landscape looks like for their industry or sector and understand the buyer versus seller pool.”

Nationally, 72 deals closed in the first quarter of 2024, according to a recent report from tracking firm GF Data. Although the number of deals is rising, their values have declined, the firm said.

Experts noted that HVAC companies, along with plumbing and electrical businesses, are increasingly sought after for mergers or takeovers. These industries are attractive to companies looking to expand, and private equity firms seeking growth and cash flow.

“We’ve seen a significant influx of interest in HVAC, plumbing, and electrical companies,” Griffith said. “These industries are essential and here to stay.”

Having independent confirmation of a successful business operation is usually necessary for a company to close a deal. This is where third-party companies come in.

“We come in, put boots on the ground and look at what’s under the cover,” UHY’s Sengulen said. “We make adjustments to your books based on what our buy-side diligence process identifies.”

For instance, if a business is selling for 10 times its earnings and claims $10 million in earnings, Sengulen ensures that those earnings are genuine.

An advisory firma bank, consultants, or accountantsis often critical to preparing a business for M&A and guiding it safely through the process.

“I think having a conversation with an M&A advisor around what that process or roadmap could look like and what are the key considerations in the business-making process is essential,” said Citizens Bank’s O’Connell.

The NYBB Group’s Griffith said he sees the current climate as strong as it’s ever been. But as buyers, including private equity or other companies, look for deals, businesses that are interested in selling should consider getting ready early.

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