Markets speak through their transactions. Not through the announced ones, which are a lagging record of decisions taken months earlier, but through the terms on which they were struck. Read enough deal structures and a picture forms of what capital currently believes about risk.
The South African mid market is telling us something fairly consistent at present. Buyers are willing to transact. They are considerably less willing to carry uncertainty they have not priced.
The gap between what sellers expect and buyers will pay
The most persistent feature of the current market is a valuation gap. It has a specific cause. Many owners anchored their expectations during a period of cheaper capital. Those expectations have proved stubborn. Buyers, meanwhile, are applying a cost of capital that reflects present conditions rather than remembered ones. The arithmetic of that difference is unforgiving. A modest change in the discount rate moves a valuation far more than most sellers appreciate.
The result is not a market where deals fail to happen. It is a market where they take longer and where the negotiation happens over structure rather than headline price.
Structure is doing the work that price used to do
Watch where the creativity is going. Earn-outs, deferred consideration, vendor financing and retained minority stakes have become the ordinary furniture of mid market transactions rather than the exception.
This is worth understanding correctly, because sellers often read it as buyers being difficult. It is not that. Structure is how a buyer bridges a gap between what a seller believes the business is worth and what the buyer can justify paying on the evidence available today. An earn-out is a buyer saying that they accept the seller's forecast might be right, while declining to pay for it before it happens.
Sellers who understand this negotiate better outcomes. Sellers who treat every deferred rand as an insult tend to end up with a lower certain number instead of a higher probable one.
Diligence has become deeper and more sceptical
Quality of earnings analysis is no longer reserved for large transactions. Buyers in the mid market now routinely interrogate the sustainability of earnings rather than accepting a reported profit figure. They are particularly attentive to anything that flatters a recent period.
Three areas draw the most scrutiny in our experience. Customer concentration, which is a structural feature of many South African mid market businesses and a real risk rather than a technicality. Working capital, where a business that has funded growth by stretching creditors will be found out. And key person dependency, where the value being purchased turns out to sit with the founder who is leaving.
None of this is new in principle. What has changed is that buyers are pricing these findings rather than noting them.
A generation of owners is reaching the same decision
There is a demographic current underneath the market that receives less attention than it deserves. A significant cohort of South African business owners built their enterprises across the 1990s and 2000s and are now reaching the point where succession has to be confronted. Many have no obvious internal successor.
That produces a steady supply of sound businesses coming to market for reasons that have nothing to do with distress. It also produces a recurring problem, which is that these businesses are frequently built around the owner in ways that only become visible during diligence.
The businesses that transact well are the ones where the owner started preparing three years before they intended to sell. The ones that struggle are those where the decision to sell and the beginning of preparation happened in the same month.
What this means if you are selling
Preparation is the whole game and it starts earlier than most owners think. The work of making a business saleable is largely the work of making it less dependent on you. That cannot be done quickly. Management depth, documented processes, clean financial records and a customer base that is not concentrated in two relationships are all things that take years rather than months to build.
Be realistic about what the evidence supports. A forecast that assumes a step change in performance will be discounted heavily unless you can show why it is credible. If you believe it, structure is your friend, because an earn-out lets you get paid for growth you are confident of delivering.
And run a proper process. A business sold to the first interested party, without competitive tension, is almost always sold below its value. That is not a criticism of the buyer. It is simply what happens when there is only one of them.
What this means if you are buying
The opportunity in this market is real, particularly for buyers with access to capital and the patience to wait for the right asset. The valuation gap that frustrates sellers is the same gap that creates entry points for disciplined acquirers.
Do the operational work. The businesses that disappoint after acquisition rarely disappoint for financial reasons that diligence would have caught. They disappoint because the operating model did not survive the departure of the founder, or because a customer relationship that looked contractual turned out to be personal.
Price the integration honestly. The cost and difficulty of integration is understated in most acquisition cases we review. It is generally the difference between a transaction that creates value and one that merely moves it.
The signal beneath the noise
Strip it back and the market is saying something reasonably simple. Capital is available. Conviction is expensive.
Buyers are not refusing to transact. They are refusing to pay for optimism. They are transferring uncertainty back to the party best placed to resolve it. For a seller with a well prepared business and evidence to support the story, this is a perfectly good market. For a seller hoping that a buyer's enthusiasm will substitute for preparation, it is a difficult one.
That distinction is where we spend most of our time.
A note on this piece. The observations here reflect our own experience of advising on transactions in the South African mid market. They are offered as professional opinion rather than as a statistical survey of deal activity. They are general in nature. Any specific transaction should be assessed on its own facts.