I just got back from the 2008 Midwest Business Brokers & Intermediaries annual symposium for lower-middle market M&A. More than 80 professionals attended the event in Milwaukee.
We heard from lenders, private equity groups (PEGs) and business intermediaries and discussed trends in the M&A marketplace.
Here is what I’ve seen and what I learned:
Lending has tightened, no surprise there, but not across the board. For lower-middle market deals, those with revenues between $1 million and $30 million, the lenders were clear: “We have money to lend.”
The biggest change is the amount of money lent. Where seller financing once made up 10-20 percent of a purchase, panel members agreed the average is now 30 percent ballooned out over a three year period.
Values have dropped slightly from their peak in mid-2006 to mid-2007 but are still above average. The consensus is that most companies had a good year which would help keep values up.
Values should also stay strong due to the increased buyer activity in the lower-middle market. Because lending is tight for major acquisitions, private equity groups and companies in growth mode are forced to look at lower-middle market deals.
PEGs are still extremely active, with two new funds added in Milwaukee alone last year. Nationwide, there’s approximately a trillion dollars that need to go to work buying businesses.
Similarly, in the last six months we’ve seen a resurgence of companies growing through acquisition, creating additional competition for PEGs.
That said, if an individual is looking to buy a business greater than $3 million, it will be tough to compete with a PEG and companies looking to grow. Many high quality executives who were looking to buy are now partnering with a PEG so they can have much stronger financial backing and strategic expertise on their board.
Likewise, we’re seeing a strong trend in business owners who are selling majority stakes to PEGs. These sellers stay with the business, using the PEG’s capital to take the company to the next level. After a set number of years, the company is typically resold at an even higher value.
In this case the business owner really gets to sell twice. It’s an opportunity to take some chips off the table, simplify life, and have access to new resources.
As for the economy, panelists predicted a recovery in about 18 months. Unfortunately, that’s the same time capital gains taxes will increase, if the current low rates are allowed to expire in 2010. Or depending on the election, we could see a rate jump up to 25 or 30 percent in 2009.
Intermediaries across the region report a high number of business owners making early inquiries and planning ahead for a future exit. They’re preparing for a successful sale. That advance planning is, perhaps, the most positive trend of all.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 888-608-9138 or [email protected]