The flat first half resulted from "a combination of interest rates and company performance — that's what drives valuations and multiples," according to PMCF Managing Director John Hart.
"Even from the buyer side, if a buyer's not performing well, they're less apt to be active, and that creates challenges for buyers and sellers," he added. "[Last year] wasn't stellar, and now that's being compounded by interest rates being higher. And it looks like higher rates are here for the foreseeable future."
Phil Karig, principal of Mathelin Bay Associates in St. Louis, said that "as long as interest rates are high, that puts pressure on financing and will cause some sellers to stay out of the market, especially if they have high expectations because of recent multiples."
Although demand remains strong for quality companies, fewer companies matching that description are available, according to David Evatz, managing director with Stout Investment Banking in Chicago.
"Companies need strong performance and a good business outlook for the next 12-24 months," he said. "There also are company-specific factors that can be causing a valuation gap and keeping a number of businesses in a holding pattern."
When financial specialists look at market data, "it's hard to deny that interest rates are affecting valuation multiples," said Andrew Hinz, managing director with Grace Matthews Inc. in Milwaukee.
"Interest rates have made it more expensive to borrow money, so if you want to own a good company, you have to pay," added Rick Weil, managing director at Mesirow Financial in Chicago.
Along with interest rates, stricter credit availability is affecting plastics M&A deal volume, according to Thomas Blaige, chairman and CEO of Blaige & Co. in Chicago.
"Banks aren't approving as many deals," he said. "But if you're a company in a profitable niche and you've got $30 [million], $50 [million], $70 million in sales, your valuation hasn't changed," Blaige said.
Lower business performance is affecting valuations as well, said Brian Flynn, investment banking director with William Blair in Chicago. "A lot of companies in packaging and other markets had a tough 2023," he added. "Softer demand is rolling through the market, so that's a low bar to clear."
"There was a frenzy of sales there for a while, with owners and operators getting good prices," said Steve Bieszczat, chief marketing officer with DelmiaWorks in Paso Robles, Calif. "Buyers rolled up medical or other specialties or built new platforms, but then [interest] rates went back up and activity went back to normal."
"It boils down to one variable, and that's interest rates, which are based on inflation and economic growth," added Matt Miller, managing director with Cascade Partners LLC in Grand Rapids, Mich.
"When people were expecting multiple rate cuts [in the first half], they were very enthusiastic," he said. "Now, people are starting to adjust to the idea that rates will be higher for longer — they're not going to drop quickly, so you have to adjust your expectations. So I think we might see some reluctant sellers and cautious buyers."