InboxInsights

Is it time?

 John Kielich, CPA - Managing Director for Kolb+Co. M&A Advisers   email | bio 
LeAnne Foster, CPA - Senior Associate for Kolb+Co. M&A Advisers   email
January 2011

After two dismal years for M&A, 2010 started to show signs of life, especially for larger transactions. Synergistic and financial buyers with cash were in the market. For larger deals, banks were lending and valuations were recovering. Banks in the lower, middle-market were constrained somewhat by regulatory restrictions and internal requirements, plus deals were not nearly as robust.  Collateral coverage was the key to a bank being serious about a transaction.  If not collateral coverage, it was the SBA safety net that led to a transaction being financed. 

Now that 2011 has arrived will things be different? Is it time to sell? The new year is still young, and we can think of no better time to discuss the state of the M&A market. There are a number of reasons for optimism and why owners should be thinking about selling.

First, the extension of the federal capital gains tax rates is still a very compelling reason to consider a sale. It is difficult to believe that even the new faces in Washington can cut enough spending in the next two years to avoid the need to increase taxes in 2013. The national deficit that has been incurred needs to be paid for at some point. We discussed the impact of taxes on a transaction in InboxInsights: New Stimulus Package for Businesses (published April 2010), and the clock is ticking. Selling a business can take several months and often requires internal modifications to be made before a business is ready to launch a sale. This means owners should act quickly before the lower tax advantage disappears.

Second, there are a lot of buyers with a lot of cash looking for quality companies. Private Equity Firms were able to raise significant new cash last year.  Reports show that Private Equity Firms have near $500 billion to invest. Similarly, synergistic buyers have strong balance sheets and need to find ways to grow. For the very small companies, there continues to be an abundant number of individual buyers with good resources. It's logical to sell into a market full of hungry buyers.

Another reason for optimism is that valuations are improving, in particular for better performing companies. Generally a better performing company is one that has both revenue growth (generally exceeding five percent) and EBITDA margins of around ten percent. GF Data Resources shows that through the third quarter of last year Total Enterprise Value to EBITDA edged up to six times for all transactions between $10 million and $250 million. This was a ten percent improvement over the second quarter of 2010, and, while it is hard to predict where valuations will be, it is a very positive sign.

Our fourth point of optimism which is correlated with the improvement in valuations is an increase in the leverage on the transactions. While nowhere near the heady days of 2006 and 2007, this is a sign of hope. Banks need to make loans to make a decent return for their shareholders, so it stands to reason that there will be an increased interest on their part to lend. In addition, in markets like Southeast Wisconsin, where there is little growth, M&A transactions oftentimes present the real opportunities for lending. 

Finally, as a business owner, if adhering to the ever increasing amount of legislation and regulations that make running a company more and more difficult has out-weighed the enjoyment of running your business, it may be time to sell as it seems unlikely that this trend will reverse itself soon.

Transactions take time to prepare and complete. The above list is by no means exhaustive but should give you a lot to consider regarding your time to sell.  Why wait?