Are surging bankruptcy rates in Australia boosting SME M&A activity?

In March, the Australian Securities and Investments Commission (ASIC) reported a record high in Australian insolvency rates, with 1,131 businesses declaring bankruptcy. This figure marks the most significant number recorded since ASIC began collecting these statistics in 1999.

As a direct consequence, the volume and value of M&A transactions in Australia experienced a significant decline in 2023.

The annual Dealmaking Insight report by Australian accounting firm William Buck shed light on this situation through comprehensive research on Australia’s M&A activities in 2023, providing insights into the current state.

According to the report, the value of M&A transactions in Australia plummeted to “pre-pandemic levels” after record-breaking years in 2021–2022. In 2023, the overall value of M&A deals was $68.2 billion, representing a significant drop from $188.8 billion the previous year.

Additionally, the report highlighted a 31 per cent decrease in M&A deal volume, dropping from 1,022 to 708 transactions in 2023, marking the lowest number of transitions recorded in the past decade.

In the face of the substantial number of businesses filing for bankruptcy in Australia and the decrease in value and volume of M&A transactions, Michael Cossetto, corporate partner at Bartier Perry, believes this situation could spur an increase in SME mergers and acquisitions.

“We’re seeing a perfect storm of generational change, growing compliance requirements, and now financial pressures impacting small to medium businesses in Australia.

“I get the sense the market has been waiting for blood to spill, and now that the rate of insolvencies has been increasing, we’re expecting M&A is only going to get busier as the year goes on,” Cossetto commented, before going on to highlight several reasons SME business owners choose to sell their businesses.

“A number of businesses that our clients are buying are family-run, with people having got to an age where they want to exit as their kids don’t want to take over.

“There is also an increasing amount of compliance and new workplace regulations, which many smaller businesses are struggling to keep up with.

“Finally, cashed-up investors who have been sitting on the sidelines for some time are now seeing plenty of opportunities to merge a series of small businesses into a far more operationally efficient and profitable mid-sized one,” Cossetto stated.

Mark Calvetti, the head of corporate finance at William Buck, echoed Cossetto’s sentiments, emphasising the vibrancy of the SME M&A market despite its current state.

“We are seeing a very active middle market for transactions despite a decrease in overall volume and value in M&A activity, being guided by an increasing number of succession-driven vendors looking to exist,” Calvetti commented.

Expecting continued growth in SME M&A over the next 12 months, Cossetto offers valuable advice to investors contemplating entering the market.

“In a frothy M&A market, due diligence is key. There may well be bargains, but there will also be financial trapdoors among some of those, which, if not uncovered early, could be very costly later on.

“No one industry or sector was expected to dominate the mid-market M&A sector, but the not-for-profit space was seeing a notable lift in activity driven by organisations unable to keep up with compliance requirements,” Cossetto said.