With a new big player entering the game, 2025 looks very attractive from an M&A perspective

Ever since the pandemic, merger and acquisition activity in the convenience services industry has been brisk. Business broker Mike Kelner has an inside view of the market and is confident that 2025 will offer a favorable climate for operators who are looking for an exit.

For convenience services operators who hope to sell their business in 2025, the outlook is promising for several reasons. One factor that will drive the market is the addition of a large entity that will compete with Canteen, Aramark, InReach and large regional players who have kept acquisition activity rolling along.

An aggressive buyer and a positive trend

While I am not at liberty to share the name of this new player until late November, I can tell you that the company just signed 400 distribution centers from the world’s largest online seller, which will send its annual sales to over $1.2 billion.

My sources tell me that this new entity intends to aggressively pursue acquisitions, which will result in multiple offers and potential bidding wars for deals — always good news for sellers.

While this new M&A development is extremely positive, other factors also should boost the optimism of operators, including a 2024 trend that is different than what I have seen in prior years. Simply put: It’s Q4, and I am still busy.

Typically, sellers will postpone deals until next year for tax reasons and they get busy with the holidays, but this year is different. I have two, possibly three deals that are scheduled to close before the end of the year. That is a very positive indicator of demand. Additionally, we see multiple offers on every deal.

Dropping interest rates

Election – A nonfactor

Will the election somehow impact M&A activity? An October report by Morgan Stanley said that political policy takes a backseat to other key factors. “Deal cycles tend to depend less on policy and more on broader factors, including the overall state of the economy, fluctuations in business activity, CEO confidence and financing conditions. More specifically, still-low activity levels, strong equity markets, the opening of new markets, impending interest rate cuts and positive industry expectations also can help M&A recover even if there are political challenges,” wrote a Morgan Stanley analyst report.

Dropping interest rates in 2025 will be a positive factor, especially for the mid-sized companies that hope to be involved in acquisitions, since borrowing will be necessary. One or two percentage points of lower interest rates can have a significant impact on a deal. A September report from Baird Financial points to historical data that supports the belief that Federal Reserve rate cuts are a catalyst for M&A activity.

“We expect M&A activity to benefit from a series of benchmark rate cuts by the U.S. Federal Reserve through 2025. This phase of the rate cycle should feature reduced loan yields that lead to increases for leveraged ratios and M&A valuations. As in the past, easing rates and higher multiples are likely to stimulate additional M&A activity, particularly since the current backdrop seems more favorable than in the previous two rate cut periods,” wrote the Baird Financial analyst report.

Return to work and rising OCS rates

If you are wondering why your daytime local traffic is busier than it has been, it is due to the “return to work” momentum that is beginning to take hold in offices around the country. That is good news for OCS operators. According to CBS News Moneywatch, a quarter of U.S. companies will require their workers to show up at the office more often next year. This data comes from ResumeBuilder.com, which surveyed 756 employers at companies with return-to-office policies in place since 2021. Among companies planning to require an increased number of days in office, 86% cited productivity as the top reason for doing so. That was followed by a desire to improve company culture (71%), employee well-being (57%) and retention (55%).

OCS operators that I am working with are already seeing the impact of the return to work, an employer interest in corporate culture and a focus on retention. Revenues are up (some are exceeding pre-COVID numbers), valuations are up and, if this trend continues, OCS business will once again be the darling of the industry for buyers, largely driven by the high margins and the all-important gross profit generated by that channel. These combined factors surrounding the return to the office will spark plenty of buyer interest, especially among those who seek to get a deal done before valuations get out of control.

The baby boomer conversation

Finally, the sentiment of operators — the sellers — must be considered. In the past three months, I have received more phone call inquiries than I have seen in the past three years. Mostly, I hear from baby boomers who are on the fence but having a debate with themselves right in front of me. It goes like this: “I’m in my 60s. I made it through COVID. I rebuilt the company. I have no one to pass the business to. Should I hang on for a while, or should I sell?”

It is all part of what I have been talking about — the tsunami of baby boomers who are getting ready to retire. 2025 might just be the biggest and final wave of that trend. From all indications, it is good timing for operators.