Current Market Trends
SOURCE: Green Bay Press Gazette, June 9, 2008
Scott Bushkie

I just got back from the 2008 Midwest Business Brokers & Intermediaries annual symposium for lower middle market M&A. Held in Milwaukee, more than 80 professionals gathered from several states.

We heard from lenders, private equity groups (PEGs) and business intermediaries and talked with each other about trends in the 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 and $30 million, the lenders were clear: “The bank is open. We have money to lend.”

The biggest change is the amount money lent. Where once seller financing made up 10-20 percent of a purchase, panel members agreed the average is now 30 percent ballooned out over a three year period.

For larger deals, the cost of getting money has gone up. While they used to offer a good quality business loan at sub 200 plus libor, not their rates have jumped to 200-250 over libor.

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.

Another big reason values should stay strong is the increased buyer activity we’re seeing 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. These companies are creating additional competition for the 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 also seeing a strong trend in business owners who are selling majority stakes to the 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 we’d see 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 even-30% 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 getting themselves in order and setting up for a success sale. That advance planning, perhaps, the most positive trend of all.

Scott Bushkie is President of Cornerstone Business Services, a lower-middle-market M&A firm with offices throughout the upper Midwest. Reach him by telephone at (920) 436-9890 or by e-mail at sbushkie@cornerstone-business.com.