2017 was a strong year for the mergers and acquisitions market. According to an article by Reuters, the market reached its third highest annual level since the financial crisis of 2008. “The market is as robust as it’s ever been. We are seeing high valuations. Average purchase price multiples are at an all-time high in mid seven times EBITDA,” says Graeme Frazier, president of Private Capital Research LLC and founder of GF Data, in an article by Axial.
An article by Business Insider states that, “To date, 2018 is the most active year for deal making on record, according to data from Bloomberg, with nearly $1.7 trillion worth of deals announced across the globe. That pace puts the market on track for $5 trillion in deals, which would blow away pre-financial crisis level highs when mergers topped $4.6 trillion in value in 2007.”
The article by Axial offers multiple factors contributing to the “frenzied deal pace” in the lower middle market:
- A tremendous amount of capital in the market
- The lending markets are feeding the frenzy
- “Debt multiples have reached a total of 4.2 times EBITDA and on the senior side, they have inched up to 3.4 times EBITDA in the lower middle market.”
- A combination of the dry powder and equity available
- “You have an abundance of debt, and buyers are willing to over-equitize these transactions today. Today, lower middle market companies that have a reasonable story have a good shot of getting the highest valuations they could ever get,” Robin Engleson, a managing partner with Sapphire Financial.
- Larger buyout firms and strategic acquirers
- After buying a platform company at a high valuation they more frequently move down market to find add-on opportunities at a better price to average down their costs.
One contributor discussing how difficult it is for buyers to compete in today’s market, says: “The larger funds are just so well capitalized that they don’t even need financing contingencies to close acquisitions in the lower end of the market, so it’s an attractive offer as a seller. The valuations for growth have become eye popping.”
The Bottom Line:
The good news for sellers is that there are no indications that market conditions will be changing any time soon. According to the article: “There’s no sign of a slowdown. We are seeing a lack of good target companies, but there’s nothing to make us believe that demand for lower middle market companies will slow down. It’s certainly a compelling market to be a seller. Owners looking to sell soon need to be ready to take advantage of this favorable market by getting prepared, including maximizing business value, in order to achieve their goals and achieve a successful business transition.
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Our mission is to assist the owners of privately held companies in making key transition decisions that impact their future as well as the future of their businesses, families, and employees.
As a business owner and co-founder of BTA, Jane Johnson recognized the need to educate business owners about the importance of planning ownership transitions to achieve their goals and ensure business continuity. The challenges Jane experienced with selling her own business inspired her to co-author the book Cashing Out of Your Business – Your Last Great Deal and develop tools and resources to inform and empower other owners to plan and execute successful ownership transitions.
Jane and her team of Business Transition Mentors also offer business transition advisory services to companies with annual revenues of more than $5 million.