M&A Update from ACG

The February ACG (Association for Corporate Growth) was the annual M&A update panel discussion. While the panel spoke of middle market deals a lot of what they covered applies to the lower middle market. Here are my top 10 takeaways, with my comments:

  1. It’s a frothy valuation market – sure is although my market has the two sanity checks the larger deals don’t have. It’s usually the buyer’s personal money (individual or small business owner) and the bank is the largest component of financing not just a small piece of it. A similar talking point was, “We’re wading into dangerous territory on multiples, which are being driven by growth and a lot of capital. 20x plus at $50 million plus deals. 
  2. There’s fear of missing out – with the low cost of capital and a demographic push based on the age of owners there is a fear there won’t be as many deals in a few years.
  3. Defense and satellite are strong vs. aerospace – I agree with this. Owners I talk to who do defense work are booming. We can see plane deliveries and how low they currently are.
  4. Must position the business correctly – to get maximum value out of it, yes. Don’t care about price, just want out? Then flip the switch and sell no matter what shape the business is in.
  5. Projections are tough with Covid – projections are tough without Covid. Keep in mind, banks will investigate (thoroughly) and Covid tailwind or headwind, as they should.
  6. Buyers want businesses well represented and presented – the more information provided upfront the better and provided by someone professional who’s done their homework.
  7. Looser definitions of EBITDA – as in the definitions are weakening. With smaller businesses this is the blending of the business and personal checkbooks (and wanting the buyer and bank to believe it all). A related point was, “watch out for big add-backs.”
  8. Founders may know how to grow but don’t want to – I get this because I see it so often. An owner is making a lot of money and doesn’t want more risk, more people, more stress. So they coast, which is opportunity for buyers.
  9. Looking at wages, benefits and other things to retain employees – retention was a huge issue to these buyers, lender, and investment banks. All shared the same thought on this, you have to keep the people you want.
  10. Can this manager think like an owner? – not as important in the small business market but it’s how you get people to grow so the owner can step back and not do day-to-day tasks. They emphasized you have to spend a lot of time on coaching and development. 

It’s an interesting time and all of us in the buy-sell & M&A industry expect 2022 to be an active year. I know we’re busy with sellers and buyers.

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