01 May Lower Middle Market M&A Update – Spring 2014
Lower middle market deal activity remains well below 2012. In fact, GF Data pegs 2013 closing at 1/2 that of 2012. And 2014, so far, is on par with 2013. Why so slow given the economy continues to improve?
Accepted wisdom points to three phenomena:
- Deal volumes in 2012 were artificially raised by sellers taking advantage of 2012’s lower tax rates (and sellers’ desire to avoid higher rates that began in 2013).
- Continued scarcity of high-quality businesses being offered for sale.
- Hostility of smaller business sellers to post–LOI price concessions – they either close at close to the original price or their deal doesn’t happen.
“Prices being paid are up, actually,” says David Perkins, Managing Director of Acquisition Advisors. “The number of closings is a fraction of what it was in 2012, but those that do sell are getting very competitive prices,” he continues.
The data in this report is collected by GF Data, a data provider on private-equity-sponsored M&A transactions with enterprise values of $10 to $250 million. Two hundred and nineteen private equity groups contribute their transaction data in this size range. It comprised 56 transactions in 2013 and 101 in 2012. The tables below reveal data about these transactions. Terms used in the tables are defined below as well.
Total enterprise value (TEV) includes: payments to seller(s) in cash or stock; the present value of notes or similar instruments, net long-term debt assumed by the buyer and appropriate adjustments for other assets retained by the seller or liabilities assumed by the buyer.
EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.
Indemnification cap refers to the general indemnification provided by the seller to the buyer against breaches of reps and warranties. This does not include carve outs for specific issues or items. For example, parties often agree that the general cap will not apply in the event of fraud.
Escrow/Holdback refers to transaction consideration either placed in escrow or retained by the seller subject to events or conditions expected to occur post-closing. For example, the parties may agree to a working capital adjustment based on financial statements that will not be available until after the end of the fiscal period. This does not include earnouts or other payments payable to the seller post-closing contingent on the selling company’s performance for a certain period post-closing.
Escrow/Holdback period refers to the time when the last of funds placed in escrow or held back are scheduled to be released.