Improved Outlook Seen In Middle-Market Mergers

The market for Mergers & Acquisitions (M&A) is clearly improving in valuations, financing availability, and deal volume and will continue to do so throughout 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.

Looming clouds on the horizon may include variations in the capital gains rate, estate changes, and uncertainty about economic growth and the effect of world events on the global economy. This is the 4th year of the Babson survey which has delivered “extremely accurate” projections in its previous years said Mulvaney.

Findings That Impact Business Owners

The environment for exit continues to improve. Valuations are rising and are projected to continue to rise. The market to sell a business or restructure capital is very good. Key is getting the company’s revenue growth and EBITDA (earnings before interest, taxes, depreciation, and amortization) to acceptable standards vs. the industry average and the expectations of the buyer.

• In 2011, valuations in most industries increased by 1-1.5 times EBITDA multiples. Most industries are still between 1-2 times EBITDA away from the peak valuations seen before the last recession

• More buyers will look for acquisitions and more strategic corporate buyers will seek out the lower end of the middle market ($10-100MM enterprise valuation companies)._• International buyers will increasingly target middle-market companies and this trend will continue if the recovery lasts.

• Financial buyers will become more active as financial institutions increase M&A loans. Most survey respondents expect a moderate improvement in contracts but better availability of funding.

• Equity requirements for financial buyers have stabilized but banks are looking for better performance from targeted companies. Financial backing for turnarounds continues to be very difficult.

• Seller’s challenge: get the deal done because the timeframe (10-12 months) is now longer from start to finish.

• A second challenge is ‘seller assistance’ for business owners. The survey shows that the percentage differs depending on the size of the deal - a low percentage in middle-market deals against a high-percentage in service industries and in smaller company transactions. Also influencing seller assistance is the financial condition of the seller’s company, the outlook for the economy and the seller’s industry in the view of the buyer.

Findings That Impact M&A Professionals

Volume continues to increase moderately and the largest concentration of activity is in service industries. A rollup strategy is sought in many service industries and service company owners are looking to combine or sell due to the challenge of rebuilding revenue bases in an industry sector that is in transformation.

• Manufacturing deals have increased (last 12 months) and will continue to rise through 2012 as more strategic buyers enter the marketplace.

• Finding qualified and real buyers continues to be the big challenge for advisors. Due diligence is dissecting current and near-term forecasted performance in great depth.

• Older populations of owners are waiting longer to sell. With age, the risk of performance interruptions rises and valuations may be impacted. Valuations decrease because owners begin to run companies for cash vs. growth. They may also have more health or partner issues.

• Deal volumes and valuations will continue to rise if Congress extends the capital gains rates and estate rules. Still, both owners and advisors must create strategies for multiple scenarios moving forward.

• Companies struggling with performance or that have not documented a turnaround from 2009-10, will not be saleable in today’s market. Companies should show four quarters of performance at or above the industry average in order to improve their chances for a successful exit.

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 current trends in the M&A market and project the outlook for the rest of 2012. Survey respondents included a national sample of leading investment banking professionals involved in middle-market and small business deals, CPAs and lawyers specializing in M&A, and other professionals who advise buyers and sellers in exit or recapitalization efforts.