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.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
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