Today we take a break from our normal blog postings to reflect on what we are thankful for as a company. We believe that it is important to take holidays like Thanksgiving seriously and reflect on those things that we have been blessed with, so we can express our gratitude in a public way.
One of the most important topics discussed in the M&A community the last several years has been the tremendous amount of committed capital on the sidelines with equity firms that has yet to be invested. This funding, known as “dry powder” or “capital overhang,” has grown over the years to be a large number indeed. It can be seen visually by the following dry powder appraisal from Preqin’s latest Private Equity Update:
A recent article on Forbes once again raised the looming issue facing baby boomer business owners: timing. Of course picking the right time to transition your business to a new owner either via a family succession or a third-party buyer has always been critical.
Historically seller’s markets have proven to be far more lucrative for business owners than buyer’s markets simply because valuations are higher during seller’s markets and buyers tend to be far more aggressive. This is what we are seeing right now in the current seller’s market that is expected to run for another 12 months or so.
However, history is not going to be a good predictor of the future when it comes to baby boomer transitions. You see, for the first time in memory, we may face a situation where the supply of companies in the market will far exceed the number of buyers.
An interesting concept that quite a few business owners are unaware of is the idea of additive growth via planned, strategic acquisitions. Unless you are familiar with how private equity firms tend to operate, the idea of creating a platform and growing it from a business development standpoint can be new.
Older business owners are likely familiar with the Harold Geneen conglomerate roll-up strategy of the 60s and 70s. Geneen, CEO of ITT at the time, literally acquired hundreds of companies in dozens of industries and created a massive business of many related and nonrelated parts. He grew the company from a medium-sized business with $765 million sales in 1961 into a multinational conglomerate with $17 billion sales in 1970. “Under Geneen's management, ITT became the archetypal modern multinational conglomerate. ITT grew primarily through a series of approximately 350 acquisitions and mergers in 80 countries,” reports his Wikipedia page.
To some analysts this proved to be highly successful, while others disagree.
A wide variety of M&A industry sources are calling 2015 a record year for deal closings. Dealogic, a leading research firm that compiles M&A transactional data throughout the world, indicates that they too believe that 2015 will prove to be a watershed year for the M&A industry.
For example, as of September 21, according to Dealogic, the total value of announced transactions worldwide at $3.1 trillion is on a pace to eclipse the former high water mark of $4.2 trillion set in 2007
A recent Wall Street Journal (WSJ) article summed up the situation we are experiencing in the current M&A cycle quite succinctly:
Just as corporate mergers and acquisitions are booming, the market for family-owned businesses has been sizzling. For more than a year, sellers have enjoyed the upper hand in negotiating price and other terms, bankers who specialize in such deals said. Especially following a period of belt-tightening during the financial crisis, the climate has spurred many family-owned businesses to explore sales with fresh urgency.
Because Generational Equity, the leading lower middle-market M&A advisory firm in North America, only focuses on privately held businesses, we concur with the WSJ analysis of current market conditions.
“Global mergers and acquisitions are on pace this year to hit the highest level on record, thanks to a buying spree from companies on the hunt for growth,” writes The Wall Street Journal.
Generational Equity concurs. In fact, as of mid-October, our deal volume was up 60% over the same timeframe last year and our deal value is more than 50% higher as well. This is substantial growth driven by a number of factors, not the least of which is the fact that we are in one of the strongest seller’s markets in ages.
Today is the third and final installment about challenges business owners face when approaching buyers without analyzing their companies as professional buyers would. In the first two installments we looked at owner dependence and customer concentration, two of the most common deal hurdles the M&A community faces when working with privately held companies.
Today we examine one of the trickier issues you may face: How to give a buyer confidence in the quality of your future revenue streams.
A couple of days ago we started a series of blog posts that look at common reasons deals either get complicated or take much longer to complete than needed. The issues we’re examining can be easily corrected with strategic planning, hard work, and dedication to addressing the issues.
In the first article we looked at the problems buyers often have with excessive owner dependence and provided guidance on how you can overcome this concern. As a reminder, we are not implying that if your company has any of these issues that your business is not sale-able or attractive to buyers. With enough of the right intangible assets, your company could be very valuable to a variety of buyers. However, what we are telling you is that if you want an OPTIMAL deal with a PREMIUM buyer, addressing these common issues can be very helpful to you and your transaction.
What does “customer concentration” mean? To different buyers it means a variety of things.