On January 28, 2013 BusinessWeek published an article Karen Klein titled, “What’s Driving the Spike in Small Business Acquisitions.” Let’s review her top three points and let me mention that the article started out by mentioning a spike in year-end closings, many driven by tax motivations.
On February 13 I attended the Seattle ACG (Association for Corporate Growth) meeting and the subject was the state of the M&A market for middle-market companies. The panelists discussed the year-end rush on deals, for tax reasons. Now I, and a few other people I talked to, didn’t see that rush. One reason might be that if you’re not ready to sell or the business isn’t worth what you want to sell it for, why sell just to save about 9% on taxes? You can’t let taxes drive your business decisions.
Here are the top three points in Klein’s article:
- There’s a demographic swing as aging business owners look to retire and many middle age employees look to entrepreneurship when they lose their job. Add to this the companies have a lot of cash and it means more deals. I don’t think that management types turning business ownership is anything new, it’s just that the pool of sellers is growing fast since the recession and there’s so much more turnover of people at big companies that more and more of them are saying, “No more.”
- The economy has improved. One of the comments was that buyers typically look at three years of financial statements and now 2009, a very bad year for many, is not included. I’ll comment that only naïve buyers look at only three years, especially when years four and five were in the heart of the recession. Every buyer out there, corporate or individual, should be looking at what the company did during the recession. We saw the same thing after the dotcom bust and 9-11. As soon as the economy got cooking, people forgot about things like downturns and recessions. A spike in 2011 or 2012 doesn’t mean it’s a trend. You have to investigate further to make sure it’s just not customers replenishing after keeping stock levels low.
- Finding good employees by buying a company. This is back in vogue. Many years ago I had two clients search for acquisitions just to get good employees. Interestingly, both clients were in LA, both had names starting with D, both were in the distribution business and both wanted to acquire good salespeople.
At the ACG meeting I noted these four points:
- Baby boomers are exiting their investments and it’s often not their baby. This is contrast to small businesses (deals under $10 million for sure) where the business often is the owner’s baby and it can get very emotional.
- From a private equity guy, “If the [investment] bankers can bring us deals…” Well, here’s a tip, why always be in an auction? Maybe you should go find your own deals.
- Lenders are looking at the deal, not just their box and most deals have about one-third equity. A refreshing outlook. This is similar to what we see in smaller deals; banks look at the whole package, business, buyer and financials, not just their box. Many years ago a banker told me they wanted a certain deal because the buyer was a successful entrepreneur and they knew he would do well.
- Due diligence is taking longer and the quality of earnings is extremely important. I relate this to making a deal on true cash flow not adjusted earnings, which may be unsustainable.
A lot of bullish feelings in all markets about the state of deal flow and quality. Good news for buyers, sellers and those of us who facilitate or finance deals.