How is the M&A market, anyway?
Business owners wanting to maximize the value of their business will decide, at some point, that the “time is right.” This might be based on unique personal circumstances (an illness or death in the family, for example), the performance of the business (a record year, perhaps), or it might be timed to coincide with what is perceived to be a “frothy” mergers and acquisitions (“M&A”) market. As a result, when we talk with groups, we often get the question, “How is the M&A market doing these days?”
It goes without saying that if you ask an investment banker whether now is a good time to go to market, it’s like asking the barber if you need a haircut. I laughed when, in 2009, I was at a presentation where a fellow investment banker told the crowd that “there was no better time than now to sell your business.” Knowing what our clients were experiencing in the market, I nearly choked on my bagel. He gave all sorts of reasons (potential higher tax rates in the future, the dearth of quality businesses for sale, the “huge” amount of private capital “sitting on the sidelines.” You get the picture).
He made this declaration despite the fact that the capital markets had ground to a virtual halt and buyers willing to pay anything close to fair market value for private companies were nowhere to be found. There were indeed a lot of deer in headlights back then, notwithstanding our hope that things would simply return to “normal.” As investment bankers, we all much preferred when capital was more reckless.
As we enter 2012, we see a somewhat different picture emerging. The shock of 2008 to the capital markets clearly left an enduring mark. Today buyers are much, much more concerned about risks, and although prices paid for private companies continue to creep upward (if not a bit sideways at times), deals take a lot longer to complete as buyers extend their periods of due diligence to ensure they have analyzed all the small details.
Conversely, after enduring the challenges since 2008, business owners are becoming more realistic about the value of their company, and at least some have reconciled themselves to the fact that they may not get a payday as large as what they once imagined. In addition, because of the headaches and stress caused by the recent crisis, many business owners are leery of enduring another significant economic strain. The headlines today about the European crisis, our own government’s inability to curtail our budget deficits and overall debt levels, and the potential for a slowdown in China only serve to escalate business owners’ anxiety. It is all reminiscent of Warren Buffett’s saying to be “fearful when others are greedy, and greedy when others are fearful.” I sense that smart investors are aggressively looking for their next opportunity in this environment of constant worry.
Given this backdrop, what we see is industry buyers with record levels of cash on their balance sheets becoming more willing to look at acquisitions as a legitimate corporate strategy (almost three quarters of the deals we manage end up going to strategic investors or buyers). However, they are very selective about the deals they will do, as they appear to have a number of opportunities to consider. We are also seeing private equity firms, with pressure from limited partners to deploy their committed capital, become more willing to do transactions with less debt (indeed, we have seen offers recently with no debt financing at all). On the other side of the equation, we are also seeing business owners become more realistic about overall valuation and deal structure. All of this combines to make the bid-ask spread in deals tighter, which we expect will lead to more deals in 2012 than we have seen in recent years.
In almost all cases, business owners should expect to have to continue to work for a period of time following closing, assuming they were involved full-time with the business pre-closing. Buyers are looking to reduce risk in their investments, and having an owner transition with the business for at least one or two years helps them reduce post-closing risk. In addition, in at least some cases (particularly with private equity investors who may not have access to sufficient third-party debt financing), business owners may need to carry some portion of the purchase price for a period of 6-24 months or longer.
In my experience, the axiom that a good deal happens when all parties feel just “OK” about the deal, but did not get everything they wanted is usually true. Given the market conditions we today face, this will be no more true than in 2012, as we continue to bridge the gap between buyer and seller and get the capital markets running at full speed again.
Chris Younger is Managing Director of CapitalValue Advisors, LLC (www.capitalvalue.net). Chris has over 20 years of experience in structuring deals and managing businesses, sales and operations. He was the co-founder and president of a 4,200-employee communications company, has purchased and sold over 30 businesses as a principal and investor, and has been an advisor to hundreds of companies. Additionally, he is the co-author with David Tolson of the book Harvest: The Definitive Guide To Selling Your Company, available on Amazon. He can be contacted at firstname.lastname@example.org.