11 Sep Fast Times in the Merger and Acquisitions Industry?
It seems the conventional wisdom is there must be a lot of activity in the deal business right now — lots of business owners wanting to sell because business conditions are so poor. In reality, however, most business owners are choosing not to sell today because valuations (i.e., the prices buyers are paying today for businesses) are down. This makes logical sense because business ownership, after all, is an investment and investors of all types endeavor to buy low and sell high.
Values are down for two reasons – business earnings have declined (in most cases) and the multiples of earnings being paid by buyers have declined. The result is a double whammy on values.
Two types of deals ARE getting done today, however. The first I call Lifestyle Sellers. These are business owners who understand that they missed their chance to sell for the higher values of a few years ago but they don’t want to continue to own and run their business until the good times return. After all, who knows when they’ll return? It could be four, seven, even ten years. Business valuations peak late in expansionary economic cycles.
Lifestyle Sellers really want to “do something different,” such as retire, travel or spend more time with their kids and grandkids. They rationally assess their situation and say, “Well, darn it, we could have gotten more if we had sold a few years ago, but life is not all about the size of your bank account. We have enough and we want to get on with the next chapter of our lives.”
An example of this is a recent seller-side client of ours, the owners of Automated Mail Service. Their business was logging revenue and profit growth but with the broad economic slide and banking woes, now might not have been the time to garner the absolute highest price and most favorable terms. Still, they chose to go forward. We executed a thorough confidential buyer search and closed a deal in the spring.
Another example is the owners of Tulsa-based Quality Aircraft Accessories, whom we represented in their recent sale to a Boston-based private equity group. A great and well-performing business but the owner-couple, whom were very active in the business, wanted to begin the next chapter of their lives … one that included a lot more free and family time.
The second type of deal that’s getting completed is the “Need to Sell.” Sometimes it’s a death or illness of the owner or key manager, but today it’s often financial pressure. Now if the business’ operations are losing money, the business may not have much value. Deals such as these are can be difficult to complete. Buyers are naturally wary. But if the business is generating positive operating cash flow but (a) it’s overleveraged and needs to restructure its balance sheet, or (b) the owner himself or herself is having financial difficulty and needs to raise cash, there are plenty of buyers today that are willing to accommodate.
An example of this type of deal is a recent client – a Taiwan-based automotive aftermarket parts manufacturer – that we assisted in buying their Oklahoma-based U.S. distributor. The seller was a Chicago-based private equity firm that had purchased the business a few years earlier.
So, contrary to conventional wisdom, M&A deal activity is pretty slow, but some deals are to be made. To be sure, it’s a buyer’s market. If you have cash and confidence the overall economy will improve, it’s time to buy. Yes, there are good companies for sale, but not nearly as many as a few years ago. Yes, there are plenty of buyers who are both willing and able to purchase companies today. And yes, plenty of banks remain willing and able to provide debt financing (despite what we read in the papers) — provided that the structure is sensible.