Steady Turnaround in Middle-Market Mergers, According to Babson Research
The market for Mergers & Acquisitions (M&A) is clearly improving and will continue throughout 2011-2012 according to a survey conducted by MBA students and Professor Kevin J. Mulvaney at Babson College in collaboration with members of The Association for Corporate Growth and Exit Planning Exchange.
The survey found a number of significant factors supporting the step up including:
- Steadily increasing senior debt availability
- Economic improvement
- New strategies for market leaders toward revenue and market share growth and
- Continuation of the capital gains tax rate to the end of 2012.
The survey also projects an increase in large corporate deals in the next 2 years and the return of private equity firms to the middle-market beginning in the 2nd half of 2011.
Implications for Business Owners and Advisors to Buyers and Sellers
- The M&A market in the coming years will not resemble past economic improvement cycles.
- Valuations will increase slowly as they are held back by fewer buyers and reduced financing.
- Business owners should plan for timing that is 'right for them' and not expect sharp improvements in valuation.
- Advisors must do more to improve their approach to partnering with owners and understand the "triangle of planning" - experienced lawyer plus experienced CPA plus skilled financial advisors - equals a higher probability of a successful transaction.
- Business owners need more education to manage the increased complexities of the exit process, and need to build their teams earlier to insure a successful exit or capital restructuring.
About The Survey
Babson College MBA students, Babson Professor Kevin J. Mulvaney, and the Association for Corporate Growth and Exit Planning Exchange surveyed and conducted interviews with more than 200 leading national professionals involved in middle-market M&As. Their goal was to define the status of the M&A market and project the outlook for the rest of 2011.
Survey respondents included a national set of leading boutique investment banking firms, large business brokers, CPAs and lawyers specializing in M&A, and other professionals who work with buyers and sellers in M&A transactions. The survey tried to glean the trends and forecasts for firms with enterprise values from 5MM to $100MM specifically.
Additional Findings Impacting Business Owners
- Valuations have begun to rebound in just about every industry. Distribution multiples of EBITDA increased by .5X EBITDA in 2010 and will continue to climb adding another .5X to EBITDA multiples in 2011. This trend in distribution valuations is triggered by the strategic acquisitions which normally occur at the beginning of the rebound from a recession as larger companies seek to grow market share and revenue by acquiring industry competitors.
- Service firm acquisitions continue to show strength as was indicated in the 2010 survey. 81 percent of respondents to the survey indicated work with service companies while 71 percent are active with distributors and 52 percent with retailers. The weakest sector is manufacturing per the survey responses.
- 78 percent of respondents expect valuations to increase in most industry sectors in 2011 driven by more financial and strategic buyers active in the M&A markets in 2011-2012.
- Premiums are being paid for companies which rebounded BOTH in revenue and EBITDA levels from 2009 to 2010 and which project and can document stronger performance in 2011. This is significant as it should help business owners focus their strategic plans.
- Smaller companies, as noted in last year's survey still are not benefitting from the uptick in valuations and M&A activity compared with middle-market companies. We project the second half of 2011 will be the time when smaller companies (($1-10MM valuation) will see the beginning of a more favorable market for exit.
- Acquisitions of middle-market companies by financial buyers (i.e. private equity firms) are still at a low level caused primarily by the lack of senior debt financing. The good news is 70 percent of survey respondents project increased bank lending for middle-market deals as 2011 unfolds. With the new SBA loan limits increased to $5MM, smaller companies will see more buyers in the market in the second half of 2011 bolstered by an ability to get increased favorable financing from active SBA lenders.
- Deal structures are still very conservative and are projected to continue conservative for the rest of 2011. The equity contribution for financial buyers of businesses increased to between 20-40 percent in the last few years and few respondents see this changing in 2011. Due diligence was documented in past surveys to have increased deal completion time by an additional three months caused by concerns about the trajectory and strength of the economy. Nothing has changed in the current survey relative to due diligence rigors, higher percentages of deferred money relative to the purchase price (20-30 percent), or challenges in negotiations to get a deal completed. 50 percent of survey respondents projected due diligence detail may actually increase further in 2011.
Additional Findings Impacting Business Advisors
- There continues to be frustration cited by advisors to business owners with lack of planning by owners contemplating or planning an exit. Over 50 percent of advisors feel the planning process with business owners needs to be more effective and 80 percent of advisors to business owners cite a need to improve their business model in this area.
- There is still a perception of unrealistic elevated valuation expectations by owners thinking about exiting their business. Over 50 percent of advisors see this as a key preparation area with owners considering exit. Valuations will not rebound quickly in most industries and thus planning for the complexity of the buyer/seller negotiation is considered a key early discussion in tomorrow's M&A market.
- 72 percent of advisors responding to the survey cite the slow and challenging negotiations between buyers and sellers as a major challenge in the 2011 M&A market. Deal structure complexities in today's M&A market demand that owners surround themselves with a skilled and experienced legal, accounting/tax and financial advisor team. None of the respondents to the survey see these complications reducing materially in 2011.
- Advisors in the M&A field are still concerned with their own firm's strategic plan. 30 percent of respondents say they are reviewing their partners in M&A deals due to the challenges of getting a deal done between willing buyers and sellers. Although this is down from 65 percent two years ago, the 30 percent was unchanged from the 2009 survey which reflects the weakened demand for deals and the challenges of successfully concluding transactions.