As we have examined in the past, we are currently in one of the strongest seller’s markets in history. This was re-confirmed recently by an article written by Danielle Fugazy and published on the Axial website. According to the article:
The M&A market as a whole remains white hot and the lower middle market is no exception. Sellers are undoubtedly benefiting from today’s strong market conditions. “The market is as robust as it’s ever been. We are seeing high valuations. Average purchase price multiples are at an all-time high,” says Graeme Frazier, president of Private Capital Research LLC and a founder of GF Data, a data provider that tracks companies with enterprise values of $10 million to $250 million. “Even rising interest rates are not quelling demand.”
Frazier makes an interesting point at the end of that paragraph. Historically, as rates rise (or even the rumor of rates rising) M&A transactions are usually affected. However, this is not the case presently, perhaps because despite rates going up the past year, they are still at historically low levels:
Robin Engleson, a managing partner with Sapphire Financial, which provides debt and equity to middle and lower middle market companies, says it’s the combination of both the dry powder and equity available fueling activity. “You have an abundance of debt, and buyers are willing to over equitize these transactions today. Today, lower middle market companies that have a reasonable story have a good shot of getting the highest valuations they could ever get,” she says.
Think about that for a moment: Sellers in this market are possibly going to get valuations that are higher for their companies than they would have gotten in 2010 in the midst of the Great Recession, and most likely, higher than what they will get when this seller’s market eventually ends.
It is worth keeping in mind, as you analyze your company in light of this news, that companies in the lower middle market (generally those valued below $100 million) are particularly attractive to professional buyers as “add-ons” to existing platform holdings. Again, according to the article:
According to PitchBook, as of Q2 2018 roughly half of all buyouts globally and more than two-thirds of all buyouts in the U.S. are add-ons. In the first quarter alone add-ons accounted for 70 percent of all buyout activity.
That is a staggering statistic and further validates the notion that casting as wide a net as possible when you look for buyers is critical. As we always say, don’t assume that the optimal buyer for your company is going to be your competitor down the street. When selling a business, reach out to a large pool of realistic targets when you begin your search and definitely don’t discount private equity firms looking for add-ons.
The question on everyone’s mind is this: When will the seller’s market end? What convergence of events will cause buyers to back off record high valuations?
Despite feeling like the market is at the top or close to it, market professionals don’t see anything on the horizon that will change market conditions anytime soon. “There’s no sign of a slow down. We are seeing a lack of good target companies, but there’s nothing to make us believe that demand for lower middle market companies will slow. It’s certainly a compelling market to be a seller,” says Frazier.
Frazier again makes two key points: It is a great time to be a seller of a business, but the major factor impacting buyers is a lack of viable targets. And a lack of targets drives valuations up even further as the pool of buyers compete with one another to land any targets that they can.
Because of where we are in the market cycle, we are asking business owners that we meet with at our M&A conferences two key questions:
Until a business owner addresses these two questions, odds are good that their market timing will be driven by external circumstances. Keep in mind that there are two kinds of business owners:
It is far better to be the former than the latter. This is why it pays to have a business exit strategy.
If you are interested in addressing the two questions above and want to be an owner that PLANS rather than REACTS, attend a Generational Equity exit planning conference soon. While there you will not only learn more about just how active buyers are but you also will be able to meet one-on-one with our M&A professionals in attendance to discuss your specific circumstances.
To learn more, visit our website or call us at 972-232-1121.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2018 Generational Equity, LLC. All Rights Reserved.
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
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
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 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
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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 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 quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
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 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
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
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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
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
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
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.
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
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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.
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