The economic climate in 2023 presented a myriad of challenges and opportunities for businesses and owners, prompting a significant shift towards more inward-focused priorities. The confluence of escalating interest rates, persistent inflation, and economic and geopolitical uncertainties put pressure on companies and depressed merger and acquisition (M&A) activity. In response, many businesses strategically prioritized strong balance sheet management, including working capital optimization and debt reduction, while also focusing on operational efficiencies and profitability.

Capital discipline was key to this realignment, and this has created a strong foundation for companies to capitalize on more strategic investments in what is expected to be an improved market landscape in 2024. By carefully assessing risk and deploying capital accordingly, companies have boosted their financial stability and flexibility.   

The higher cost of capital has impacted cash flow and financial flexibility, prompting companies to deploy more stringent governance and robust decision-making processes with respect to capital allocation decisions. Companies are looking for the highest returning actions without having to take on too much risk. Given the uncertainties in the market, which translate to risk, and higher interest rates, businesses have exhibited more caution around longer-term growth initiatives with an implied higher risk profile. Companies have also sought less risky returns from alternative investment options or through returning capital to shareholders.

This, in combination with private equity firms cooling their M&A activity, has been reflected in yet another soft year for M&A broadly. However, M&A activity showed strength for certain types of businesses. Businesses with top-quality, differentiated business models, defensible market positions, and resilient revenue continued to garner attention from investors, according to Harris Williams. In addition, larger corporations with robust balance sheets have been seizing opportunities to acquire appealing targets at favorable valuations. 

PNC Corporate Advisory observed a notable uptick in intra-family and management buyouts in 2023, along with shareholders implementing diversification strategies. This upward trend is expected to continue in 2024, with PNC anticipating increased interest among private business owners to explore liquidity and exit alternatives. These alternatives include selling to a strategic or financial buyer, internal transitions to management or family, selling to an Employee Stock Ownership Program (ESOP), or taking the company public.

“There are promising indicators that businesses and owners are preparing for a more stable economic environment. PNC Advisory teams are seeing a healthy and growing pipeline of owners prepared to transition when the timing is right,” said Julie Williams, head of PNC Advisory.

Optimism for 2024

There is reason to be cautiously optimistic that 2024 will deliver improved conditions and a more favorable landscape for businesses and owners to prioritize strategic objectives, like acquisitions or shareholder transactions. Improving confidence in the economy, cooling inflation, and more stable interest rates are setting the stage for a more conducive environment for businesses looking to make strategic investments and sellers who are ready to monetize their investment or who are seeking strategic investment to support growth. 

Many businesses and private equity firms that postponed deals during the past year or focused more on internal efficiency are signaling a potential 2024 rebound in activity. "Companies and business owners are ready to seize opportunities in a more stable and favorable environment,” Williams said. “Through the challenges presented in 2023, PNC has been helping our clients achieve their strategic growth plans, to optimize shareholder value and prepare for and execute successful transitions of ownership when conditions improve.” 

Ready to Help

PNC has specialists that can work with you to develop strategies for success in transitioning ownership of your business. For more information, reach out to your PNC Relationship Manager, or contact us.