The reality of supply and demand is truly impacting the M&A market right now:
There is too much capital chasing too few companies!
According to a recent article in the Indianapolis Business Journal, the M&A market is so hot that some prospective buyers say they're interested in a purchase, but they're too busy at the moment with other acquisitions. We are hearing the same thing from many buyers we are dealing with.
The great news for owners of privately held companies is that all the buyer activity is helping to drive valuations up above historical levels. According to International Business Brokers Association, M&A Source, and the Pepperdine Private Capital Markets Project, in the first three months of the year, the typical purchase price was 6.1 times EBITDA for a company valued between $5 million and $50 million. That's up by more than a third from four years earlier.
Let the last part of that paragraph sink in for a moment. Four years ago companies in the lower middle market were selling for 33% LESS than they are in 2018. That is a significant increase in valuations overall.
Keep in mind that this is an average based on deals with disclosed values. So it is not a huge sample size, since most transactions in that range have no financial details disclosed.
And, it does not guarantee that you will be able to get a valuation of that size for your company when you decide to exit, because value is affected by the quality of your business, its potential growth, and profitability compared to other companies in your industry.
However, it is a good indication that if your business is buyer ready, and you personally are also prepared to create some form of exit plan, now is a fantastic time to enter the M&A market.
A business that is buyer ready is one where the operations of the business have been built in such a way that the risk that buyers perceive is lower when compared to similar investment opportunities.
Right now buyers are competing against one another to locate and close deals for companies that are on the path to being buyer ready. There is so much activity/interest in lower middle market businesses that even companies in need of improvement are achieving higher valuations than they would in a typical market (like four years ago and the pending “buyer’s market”).
Because the sad reality is that as with all other market cycles, seller’s markets can quickly reverse as they are largely driven by buyer confidence in the future and are thus dramatically and directly impacted by economic fluctuations. For example, eventually interest rates will reach a level where the cost of capital will put a brake on business valuation calculations, since the ROI on the investment will justify a lower valuation.
Another factor to keep an eye on is the yield curve. As we discussed in a past post on this topic, the yield curve is the difference between interest rates on short-term United States government bonds, say 2-year Treasury notes, and long-term government bonds, like 10-year Treasury notes.
Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.
At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking. When these two indices cross, when the curves are inverted, history shows a recession soon follows.
Now, halfway through 2018, according to The Times:
The gap between 2-year and 10-year United States Treasury notes is roughly 0.34 percentage points. It was last at these levels in 2007 when the United States economy was heading into what was arguably the worst recession in almost 80 years.
These are just two factors that can quickly halt an M&A seller’s market and drive business valuations down.
The sooner you make a move to get started on your exit plan, the closer you will be to receiving maximum value for your company.
If you would like to learn more about other factors driving company valuations up today and scenarios that may turn the tide in the other direction, you should attend a Generational Equity exit planning conference. Held regularly throughout the U.S. and Canada, these meetings enable you to bolster your knowledge of the M&A process and better plan your exit. They are very educational and come highly recommended by business owners:
To learn how you can attend a conference near you and find out how you can take advantage of the current seller’s market, please call us at 972-232-1121 or visit our website, provide us with your contact info, and we will be in touch.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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
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
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.
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
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
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
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.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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
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
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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.
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.
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
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
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
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
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