Shift to ‘acquire our growth’
NORTH BAY — Business-succession experts say North Bay companies are increasingly growing more through acquisition than organically, in line with a new national survey of merger-and-acquisition activity.
Launched as a collaboration between the International Business Brokers Association, M&A Source and the Pepperdine University Graziadio School of Business and Management, the Market Pulse Quarterly Survey Report shows that smaller middle-market companies are buying other small businesses at a greater rate than individuals and private-equity groups, seeking growth through acquisition.
The report represents what leaders in the effort said was the first credible survey for business acquisition trends concerning smaller, middle-market companies.
Owners of businesses valued up to $50 million are in a largely seller’s market, with earnings outlooks that have improved significantly after the worst of the recession, according to leaders in the survey effort and North Bay advisers for business succession, mergers and acquisitions.
“In the last five or six years, there has been so much uncertainty in the marketplace,” said Scott Bushkie, a member of the association board and part of the group that launched the report. “We have as much clarity as we’re going to have. With the economy growing slowly, it’s hard to grow organically. The shift is, ‘We’re going to acquire our growth.’”
Representing responses from about 300 firms involved in advising and financing business succession, mergers and acquisition, Market Pulse’s recent survey reflects transactions in April through June.
It is the first full year of data, and it showed that existing companies completed 50 percent of acquisitions valued between $5 million and $50 million for that quarter. That percentage was up from the second quarter of 2012, when private-equity firms accounted for half the deals in that range.
The opportunity for a synergistic benefit from acquiring a related or complementary business has traditionally driven existing businesses to bid more aggressively than other buyers, said Al Statz, president of Petaluma-based Exit Strategies Group. But the current economy has further enhanced that trend, prompting businesses to hold larger cash reserves and leaving financing available at what are still historically low interest rates.
“The best time for any owner to sell is when interest rates are low, the tax rate is favorable and banks are lending,” he said.
The convergence of those conditions has added further momentum to a wave of business transactions brought on by a generation of entrepreneurial baby boomers seeking retirement. Many had held off on those plans during the worst of the recession, and the improving outlook has helped to propel greater demand for estate and succession planning.
“We’re seeing a major uptick in transactions and business formations over the past few years,” said Donald Black, an attorney specializing in business-succession planning at Anderson, Zeigler, Disharoon, Gallagher & Gray. “From the estate-planning side, a lot of people were sitting on the sidelines waiting to see what would happen with the fiscal cliff. We got a lot of certainty in 2013. We’re really able to plan accordingly.”
Advisers in the survey agreed 3-to-1 that the current period is the best environment for sellers since past peaks in 2007 and 2008. Buyers often determine a benchmark purchase price by multiplying a company’s annual earnings against some number reflecting future earnings potential, and many business owners have seen those values improve in recent years, according to Mr. Statz.
“When earnings are up, that affects pricing. But it’s also the quality of those earnings,” he said. “From a bank, buyer and seller perspective, buyers are going to be willing to pay more when there is an expectation of growth.”
Companies priced at less than $2 million had multiples commonly ranging from 200 percent to 250 percent of earnings, according to the report. Larger companies had greater multiples, at 400 percent for the $2 million to $5 million range, and even higher for prices up to $50 million.
The conditions for some of the smallest business deals, valued between $500,000 and $5 million, were considered “neutral,” according to the report. Yet all but the very smallest of businesses are likely to be subject to the current demand for acquisition by existing companies, as demand exceeds the inflow of supply from hopeful retirees, Mr. Statz said.
“Because of the recession, a lot of these people put off retirement,” he said. “But in the past five years or so, we’ve seen a lot of growth. That makes it the best time in the past few years for baby boomers.”
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