2023: The Year Ahead for the M&A and Capital Markets

From 2014 through 2021, the United States mergers and acquisitions (M&A) market experienced a tremendous amount of activity relative to the years immediately following the Great Recession (2009–2013). In 2022, the M&A market experienced a pullback relative to 2021’s performance, but by historical standards, M&A activity held strong and remained on solid footing. Furthermore, the dermatology and aesthetics M&A market maintained a robust pace of activity, reflecting the resiliency and growth of this attractive industry.

Over the past 12 months, the global economy has experienced new challenges that included supply chain bottlenecks, torrid inflation, rising interest rates, challenges in finding talent, and the looming threat of a recession. Although Bundy Group’s clients continued to perform well in 2022, especially in the dermatology and aesthetics sector, they are aware of these headwinds and our team is frequently on the receiving end of questions from owners and executives regarding the future of the economy and M&A markets. Key questions that our team receives include the following. First, if there is a recession in 2023, what would the impact be on the dermatology and aesthetics industry and my practice? Second, what does the next year look like for the M&A and capital placement markets and the corresponding value of my business?

The questions are relevant, and this article shares some of our thoughts as 2023 progresses.

A recession could happen, but not all industries will be significantly affected. No one knows for certain if a recession will happen in 2023. We often advise clients to plan for the worst and hope for the best, so we are recommending companies and practices prepare for a recession in 2023. During down periods, the market identifies which services and solutions are of greatest importance to businesses and consumers. Industries that provide highly valued offerings, such as dermatology and aesthetics services, are expected to maintain quality momentum over the next 12 months. Companies that reside in the discretionary offerings category, or that are embedded in more cyclical industries, could be more negatively impacted during a recession.

Dana Jacoby, president of Vector Medical Group, a health care consulting firm located in Denver, Colorado, for the dermatology sector, told us, “The baby boomers continue to live longer. They expect better quality of life. That includes critical interventions for things such as melanoma as well as a general desire to enjoy a more youthful appearance.” She concluded, “The combined effect of those factors will result in a continued demand for dermatology and aesthetic services, including in 2023, which in turn equates to excellent investment opportunities.”

Buyers and investors will more thoroughly evaluate acquisitions … and hunt for value acquisitions. Even in strong economies, buyers are focused on finding quality companies and practices to buy at lower valuations. A recessionary environment gives strategic buyers and financial sponsors (ie, private equity, family office, institutional investment funds) a more powerful excuse to extend their due diligence, create doubt about the selling practice, and ultimately try to acquire the business at a lower valuation. For those organizations that are seeking to sell or raise capital in 2023, the owners and executives should focus even further on developing and maintaining an optimal position of strength to protect and drive value. For an in-demand market such as dermatology and aesthetics, owners of practices in this segment should utilize the power of buyer competition as a means for exiting at a premium value.

Dermatology and aesthetics platform investments will still be coveted, but 2023 will be the year of the add-on acquisition. Financial sponsors, public companies, and even privately-owned organizations are often seeking sizable “platform” investments in the dermatology and aesthetics sector. However, add-on acquisitions for existing dermatology and aesthetics platform investments will be common in 2023. This will be for several key reasons:

• The platform organization can realize synergies by acquiring complementary add-on practices.
• On average, add-on acquisitions require a relatively lower capital outlay than a platform acquisition, which results in a lower-risk transaction for the buyer.
• The dermatology and aesthetics industry has a robust number of existing platforms. Furthermore, there is still a critical mass of small to medium-sized practices due to the fragmented nature of the dermatology and aesthetics sector. This creates a fertile base for add-on acquisitions to be completed by platforms seeking inorganic growth.

Business valuations–which direction in 2023? A potential recessionary environment, coupled with higher costs of capital (ie, driven by higher interest rates), can negatively impact valuations. However, a business can retain value through strategies such as the following:

• Operating in a noncyclical industry, such as the dermatology and aesthetics market
• Providing sought-after offerings and solutions, such as Mohs surgery and cosmetics
• Managing by such fundamentals as stability, profitability, and growth
• Utilizing the power of buyer and investor competition to maximize value

The dermatology and aesthetics industry has continued to demonstrate an increasing valuation trend over the past 5 years. The current macroeconomic trends could place pressure on valuations for practices. However, the extreme buyer demand for dermatology and aesthetics practices can serve as an effective counterbalance to this pressure, especially when marshalled in a competitive process.

Abundance of Capital. There continues to be an enormous pool of capital in the market available to invest in the private markets. To be specific, there is approximately $3.3 trillion in cumulative global overhang or capital committed by investors for private company investments that has not yet been invested.^{1 The financial sponsors managing this pool of capital would much prefer putting these funds to work instead of giving them back to investors. In addition, debt capital providers are numerous, but 2023 will see lenders be selective in deals they pursue and will likely require higher equity contributions by strategic and financial sponsor buyers for transactions.}

Targeted Sale or Capital Raise Processes. In 2023, it will be critical for a seller or firm raising capital to select the right parties for conversations. Instead of running a broad competitive process, which involves talking to many parties, it could be more advantageous to start with a highly targeted group of strategic buyers and financial sponsors. This contingent should have a deep understanding of the dermatology and aesthetics industry, have a track record of closing transactions in the segment, be well capitalized, and demonstrate an aggressive acquisition/investment focus for 2023.

Options Available for Sale. Practices may not be interested in a full or majority equity liquidity event today, but the owners may require capital for such goals as funding growth, partner buyout, refinancing debt, or paying the owners a dividend. Also, these organizations may desire a capital provider that can offer additional resources, such as strategic and administrative support and board-level advice.

• Senior Debt: Utilizing commercial bank debt or debt from private lenders at commercial banking-like terms
• Debt and Minority Equity: Using a combination of senior and/or junior debt, in coordination with selling minority equity or offering equity warrants. Over the past decade, the market has seen the evolution of these groups, that now offer a wider range of flexible capital options for companies and practices.
• Minority Equity: Companies that want to avoid leverage and don’t want to give up equity control can pursue a sale of minority equity to capital groups that provide this solution.

It is certain to be an interesting and dynamic year. The macroeconomic environment could create a wider gulf between companies in terms of business performance, value retention, and ability to sell or raise capital. That said, Bundy Group is optimistic about the dermatology and aesthetics market and continued momentum in M&A and capital placement activity for this coveted segment. As investment banking advisors, our team sees numerous opportunities and options for medical practices, but we advise practice owners and executives to stay attuned to market trends and look for opportunities for maintenance and growth in 2023.

1. Wiek, Hilary. Global private market fundraising report. Pitchbook. 2022 Annual Global Private Market Fundraising Report. November 30, 2022. Accessed February 13, 2023. https://get.pitchbook.com/pitchbook-data/