Private Equity: “Open for Business”

We’ve been talking to private equity groups around the country to keep a pulse on where the M&A market is at right now. The message we keep hearing is that these firms are “open for business.”

Private equity firms are in the business of buying businesses. It’s how they deliver investor returns. They don’t have time to sit back and wait things out. The clock is ticking as they work to meet investor expectations within fund deadlines.

These firms are good about tracking and studying their deal flow. They have data, from several years, on the volume and quality of leads they field.

What we’re hearing, from multiple private equity firms, is that the number of good, quality companies coming to market is less than 50 to 80% from a year ago. Thus, the law of supply and demand can (and is) still working in sellers’ favor.

However, some buyers have pulled out of the market. Based on what we’re seeing and what our peer organizations think, we are estimating that about 25% of buyers have left the market. Compared to the number of new sellers who are delaying going to market, we still see an imbalance.

Competition has kept valuations and deal structures strong. Previously, we predicted sellers would be sharing much more of the risk through increased earnouts and other alternative deal arrangements. Although we are seeing some of this, strong companies are still receiving a premium.

In fact, according to the latest Market Pulse Report sponsored by IBBA and M&A Source, the Q2 median selling prices in the Main Street market came in anywhere from 89 to 92% of benchmark. Meanwhile, lower middle-market companies in the $5 million to $50 million range achieved the highest values at 100% of benchmark.

The lower M&A market is somewhat mirroring the phenomenon in the home buying market right now. Fewer sellers are listing their homes, yet buyer demand remains high. According to recent Zillow data, new for-sale listings are down about 25% from a year ago whereas house values are up 4.3% year-over-year.

To clarify, sellers that are faring well in the lower M&A market are those who have been relatively unaffected by COVID-19 as well as those who were able to recover quickly. Essential businesses and those who have otherwise remained resilient are still having success in the M&A market.

As an example of the competitive dynamics at play, one of our Cornerstone International Alliance association members took a  business to market and had 43 signed non-disclosure agreements in 2.5 weeks. That is nearly 10 more vetted, qualified “looks” than typically received in twice that time. Within 30 days from going to market, there were four written indications of interest on the table.

Another association member just sold a company with $4-5 million in EBITDA at an eight-multiple – which is well above the average market peak. In that deal, the seller is getting 80% cash at close.

If you are thinking you have to wait out the market to sell, talk to an M&A advisor before you count yourself out. If you have a quality business, it is easier to get attention right now. Buyers have fewer businesses to consider and they are no longer traveling all over the country to vet opportunities.

The right businesses are still selling with strong values and favorable deal structures. The window has not closed for high-quality companies; in fact, you may be able to benefit from current market dynamics.

 

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