The International Business Brokers Association (IBBA) and the M&A Source, in partnership with Pepperdine Private Capital Markets Project, conduct a quarterly survey of M&A intermediaries. Entitled “The Market Pulse Report,” the survey gives timely and accurate data regarding trends and issues impacting and affecting the lower middle-market mergers & acquisitions (M&A) industry.
Two hundred fifty respondents from 42 states completed the first quarter 2014 survey. The majority of respondents (54 percent) had at least 10 years of experience in the M&A industry. Participating advisors reported closing 235 transactions in first quarter 2014. The survey revealed several interesting trends, as reported in the Green Bay Press Gazette:
“Business buyers are talking about a ‘frothy’ market again. It's a challenge to compete in this active market and get a company that makes sense for them. Still, all that activity isn't deterring buyers. In reviewing the Market Pulse results for Q1 2014, we noted that confidence appears to be strong for buyers in the lower middle market (deals valued at $2 million to $50 million).”
Generational Equity is seeing the same trend in our business as well. Buyers are more aggressive than they have been in several years and are looking specifically for well run, profitable, lower middle-market companies (we tend to value this range from $2 million to $100 million). Because deals of this size tend to be structured using a combination of capital sources, The Market Pulse Report also revealed this interesting deal structuring trend:
“What we're seeing is that many buyers are going all in and putting all their eggs in one basket. Buyers are cashing out their 401Ks, taking out additional mortgages on their homes, and tapping friends and family for help to finance their deals, at significantly greater rates than this time last year.”
This is an interesting change indeed. It tells us two things: Buyers have more confidence than they have in years in investing in smaller, privately held companies AND they are choosing to invest their capital in lower middle-market businesses despite the risk associated in doing so.
Let’s face it: Acquiring a privately held business in any market carries with it a certain amount of risk. However, what buyers are saying today is that risk is low in relation to the ROI (return on investment) they expect to earn during the next 5-10 years or more.
What M&A intermediaries are learning in today’s environment is that the return in the stock market, although at historic highs, carries with it the bad taste of the financial crash of 2008 and 2009 when we experienced an economic contraction of historic proportions. And given our record low interest rates, who is making money in any bank right now?
So savvy, high net-worth investors are strategically choosing to acquire lower middle-market businesses as an investment for the future. Here is how Green Bay Press Gazette put it:
“But so far in 2014, buyers seem pretty confident in their own abilities. Instead of doing a smaller deal and leaving their retirement and home equity intact, they're going all in and using cheaper, more personal, riskier methods of getting equity. And if their instincts are right, they will be very happy with the results down the road.”
Of course buying a smaller privately held business is not for everyone. You have to be prepared to work hard, you have to love the business the company is in, and be willing to make a myriad of personal sacrifices to make it work. However, buying an established company with a recognized brand, a market niche, loyal customers, and solid employee base is far LESS risky than starting a business from scratch.
Interestingly, far too many sellers forget that point. They undervalue the intangible assets in their business, often because they are burned out from running the company. They forget that in the hands of someone enthused, perhaps younger, and with more capital, the business can grow dramatically.
In fact, across all valuation ranges, retirement and burnout were the dominating seller motivations in the latest Market Pulse Report. When a business owner reaches that point in his or her life, we have found that the business will usually stagnate and stall on its growth trajectory, making it a perfect opportunity for a new buyer.
And this is what we are seeing in today’s environment: Younger buyers with a willingness to risk it all for the opportunity of earning a greater return than they can anywhere else.
Many of you reading this may have unknowingly reached the burnout phase of your business ownership career. If you no longer find fulfillment in the daily grind and if you don’t look forward to going to work in the morning as you used to, it may be time to consider looking for a buyer. And right now, even if you own and operate a very small company, buyers may find you of interest.
To learn more, please attend a Generational Equity exit planning workshop. While there you will learn more about buyer activity in today’s market and leave the meeting with a significant knowledge base that you did not have before. Our seminars are complimentary, educational and are designed with one goal: to help business owners learn how to monetize their most prized possession. Call us at 972-232-1193 or fill out a contact form to learn more and to find out if your business qualifies you to attend.
And special thanks to the IBBA, the M&A Source, and Pepperdine’s Private Capital Markets Project for once again taking the pulse of the lower middle-market and giving us new food for thought about current trends.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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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.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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 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 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
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.
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
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
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 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 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 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.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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 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
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.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
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
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.
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
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 would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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.
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
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