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  • Tue, Jul 11 2017
  • Market Pulse Q1 2017

    M&A Market Snapshot – July 2017

     

    With the Participation of Legacy Mergers & Acquisitions, the International Business Brokers Association (IBBA) and M&A Source, in partnership with Pepperdine Private Capital Markets Project, have set a goal to provide quality information relating to M&A transactions.  This data is from the 2017 Q1 Market Pulse Survey.

    In this month’s report, we will look at:

    • Interest Rates & Political Impact
    • What Sellers Care Most About
    • What Gets Negotiated Most Besides Purchase Price
    • Sale Price Multiples
    • Know Your Buyer

    OPTIMISM DAMPENED BY RISING INTEREST RATES

    The Federal Reserve raised its benchmark interest rate in March and additional increases are expected by the end of 2017. Advisors were asked to weigh in on how rising interest rates will impact the Main Street brokerage and lower middle M&A markets. Most (62%) believe the shift will impact the ability to finance transactions. Meanwhile almost half (47%) of advisors predict a decrease in valuations, and about 40% predict a decrease in the buyer pool.

    “By raising interest rates, the Federal Reserve is signaling that the economy is improving and lender risks are decreasing. An interest rate increase should encourage lenders to initiate more loans, allowing them to gain a higher yield on their capital,” said Craig Everett, PhD, Director of the Pepperdine Private Capital Markets Project.

    “However, rising interest rates also mean borrowing will become more expensive. That raises the total cost of a transaction, which is why advisors are somewhat pessimistic about getting deals financed at the current values,” Everett continued. “Either way, buyers and sellers who are looking to complete a transaction should accelerate their efforts now, before lending costs increase and values decrease because neither of these conditions are conducive to completing a transaction.”

    What Do Sellers Care Most About Besides Money?

    When it comes to selling a business, owners care about more than just money. Advisors indicate that cash at close is a key desirable for sellers, as is taking care of their employees. Getting out quickly and leaving a legacy are also highly valued. Results indicate that a relative minority of sellers are interested in employment contracts and other deal structures that keep them active in business.

    slide 1 july 2017

    “Sellers do come to the table with a Jerry Maguire ‘SHOW ME THE MONEY’ attitude,” said Teija Heikkilä, CM&AP, Principal, National Kennel Sales & Appraisals. “And although that is a number one concern as this is their life’s work in many cases, taking care of employees is a close second. I’ve personally seen many situations in which a business owner takes a lesser amount to work with a buyer whom they believe will protect employee jobs and maintain a consistent culture.”

    “As a note to would-be-buyers, don’t assume it’s all about the cash. Ask the business owner what’s important to them and see how that fits with what you’re trying to accomplish for yourself and your organization,” Heikkilä continued.

    Not surprisingly, deal structure is a negotiation factor in most transactions. That’s followed by negotiations over closing date, and an employment contract or non-compete contract for the seller. More than a third of deals include negotiations over reps and warranties as well as working capital.

    The Most Negotiated Item in the Closed Deals (Besides Purchase Price)

    Most Negotiated Items July 2017

    Sale Price Multiples

    Seller market sentiment, which had seen a decline last quarter, is now back on a positive trend. Multiples continue to remain strong in all categories, demonstrating a plateau in the Main Street market. Year-over-year, multiples saw the biggest gains in the $2MM-$5MM sector

    Multiples July 2017

    This quarter, SDE was used most commonly in all categories except for $5 million to $50 million. But typically, EBITDA is used as the multiple type throughout the entire lower middle market. SDE adds back one owner compensation to the bottom line, whereas EBITDA leaves a fair market salary in the P&L, as would be required to hire a CEO or general manager

    Know Your Buyer

    Using the Market Pulse survey results, we can identify common buyer personas for each industry segment.

    < $500K

    Buyers in this market segment tend to be first-time business owners looking to “buy a job” by acquiring a business that can provide sufficient income/owner’s salary. These buyers are usually located with 20 miles of the business they acquire.

    • Buyer type: 1st time: 50% | serial entrepreneur: 34%

    • Location: within 20 miles: 75%

    • Motivation: buy a job: 53%

    $500K - $1MM

    Buyers in this segment also tend to be first-time owners, looking to buy a job, within 20 miles of their home. About a quarter of these buyers, however, will be serial entrepreneurs and another quarter will be existing businesses looking to grow through acquisition.

    • Buyer type: 1st time: 46% | existing business: 26% | serial entrepreneur: 22%

    • Location: within 20 miles: 56% | over 100 miles: 20%

    • Motivation: buy a job: 38%

    $1MM - $2MM

    Buyers in this segment are still most likely to be first-time owners, followed by serial entrepreneurs and existing businesses. Their motivations cross three consistent themes: buying a job, better ROI than other investments, and growth through acquisition. Again, most of these buyers will be sourced within a 20-mile radius of the seller.

    • Buyer type: 1st time: 38% | serial entrepreneur: 32% | existing business: 26%

    • Location: within 20 miles: 50% | over 100 miles: 29%

    • Motivation: strategic growth: 35% | investment: 29% | buy a job: 29%

    $2MM - $5MM

    Buyers in this segment are most likely to be existing businesses looking to grow through acquisition. However, first-time buyers still represent a quarter of the buyers. Buyers here are just as likely to be sourced locally as farther afield.

    • Buyer type: existing business: 29% | 1st time: 24% | private equity: 24%

    • Location: within 20 miles: 35% | over 100 miles: 24%

    • Motivation: strategic growth :53% | investment: 24% | buy a job: 18%

    $5MM - $50MM

    Buyers in this segment are split between existing businesses (strategic buyers) and private equity firms. These buyers target businesses that represent strong investment opportunities and/or strategic growth opportunities through vertical or horizontal add-ons. Most of these buyers are based 100 miles or more away from the seller.

    • Buyer type: private equity: 38% | existing businesses: 38%

    • Location: over 100 miles: 56%

    • Motivation: strategic growth: 57% | investment: 25%

    Reflecting on other current events, most advisors (72%) do not believe that the Republicans’ failure to pass a new healthcare plan will impact market activity. Meanwhile, advisor optimism for new client engagements remains moderately positive, at 3.6 on a five-point scale. However, expectations for business valuation increases are more cautious at 3.1 across every sector.

    Thank you for reading our Monthly M&A Snapshot.  Please email us at i[email protected] or visit our website www.LegacyMergers.com if you have questions or would like additional information.