This time of year, as it is with most industries, the M&A press is full of predictions, projections, forecasts, and prognostications regarding what should expect from M&A activity in 2016. I keep my eyes open for these because I feel it is important to pass them on to business owners who regularly read this blog and are interested in planning for their eventual exit.
For example, a recent article in Forbes, entitled “The Record Merger Boom Won't Stop in 2016, Because Money Is Still Cheap,” pointed out some interesting facts, such as:
“It was a year for the record books when it comes to merger and acquisition activity. Nearly $5 trillion in deals were cut globally, a new all-time high, as dealmakers used consolidation to uncover cost cuts, bolster their scale and take advantage of historically low borrowing costs. Though 2016 may be a tougher year if emerging market growth slows further and the impact of a sharp rout in commodities hits North America, few expect today’s merger boom to slow.”
I have taken the liberty of highlighting two statements above because they are important to focus on. First, as we discussed a few days ago, even with the Fed raising their benchmark rates slightly in December, borrowing costs for acquisition purposes are simply not expected to go up that much. This is great news for anyone considering their exit in 2016.
The reality is this: Even relatively smaller transactions have some component of financing associated with them. Because of this, as stated, “few expect today’s merger boom to slow.” Our dealmakers are in agreement with this and are positive about the prospects for their clients finding optimal buyers in 2016.
As Forbes looks at it, the fundamentals in the M&A market are simply far too positive:
“Corporations are using cheap debt financing to buy competitors and wrench out synergies that can quickly grow their earnings. Amid a mostly halting economic recovery in the United States, M&A has proven far more attractive and easy to pitch to investors than an expansion, which might require increased plant and equipment and rising expenses. For the nation’s largest companies, there’s also been a race to increase market power, or respond to consolidation among competitors.”
Some key points here. First, as history has shown repeatedly, a “buy and build” strategy is far more financially lucrative than to start a business from scratch or even an expansion play. Many of you are operating businesses that have established client/vendor relationships. You also have experienced employees and documented processes that make you extremely attractive to many buyers. These fundamental opportunities are what are driving the current M&A cycle, not necessarily external forces such as record low interest rates. Again, according to Forbes:
“The Federal Reserve’s increase of short-term interest rates in mid-December marks the end of a seven-year zero interest rate era, but it’s unlikely to dramatically increase corporate borrowing costs or change the calculus on M&A….. The impetus for mergers may only accelerate in the coming year.
‘Long standing competitors are now combining for increased scale and domination,’ Martyn Curragh and Neil Dhar of PricewaterhouseCoopers stated in a recent M&A outlook. ‘In an era where growth is challenged and competition is relentless, there is a heightened recognition that if you don’t transform, scale and evolve, growth will be non-existent.’”
Mr. Curragh and Dhar are also in agreement: The factors driving M&A activity will remain in full force in 2016, ameliorating any Fed action on rates (assuming that they make a move to raise rates again in 2016 at all – a notion that is losing steam as the stock market fluctuates wildly). In fact, the dynamics driving buyer activity MAY even cause the market to accelerate as buyers look for more and more hard-to-find quality sellers.
What does this all mean to you, if you own a privately held company today? Several things.
First, internalize the facts that indicate that we are in the midst of the strongest seller’s market in ages. If you are on the fence, if you have considered moving forward with your exit plans but are waiting for the right time, well, all I can say is the odds of the market getting any better are slim. I would hate to see you miss this opportunity if we face a far different situation in 2017, post-election.
Secondly, the perfect starting point in your exit planning process, even if you have a plan in place, is to attend a complimentary, educational Generational Equity M&A seminar. Not only will you learn a tremendous amount about current M&A trends, you will also have the opportunity to meet with our M&A advisors one-on-one to discuss any issues specific to your opportunity.
And remember, it takes 9-18 months to close most transactions with optimal buyers. If so, there is still time for you to take action and defend the financial legacy you have built into your business.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
© 2016 Generational Equity, LLC. All Rights Reserved.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
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I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
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