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. And 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. And 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 pretty good about tracking and studying their deal flow. They have data, going back 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 down anywhere from 50 to 80% over a year ago. That means the law supply and demand can (and is) still working in sellers’ favor.
We know that some buyers have pulled out of the market. Based on what we’re seeing and what our peer organizations think, I’m estimating about 25% of buyers have left the market. But compare that to the number of new sellers who aren’t going to market right now, and we still have an imbalance.

That competition has kept valuations and even deal structures strong. Previously, we predicted sellers would be sharing much more of the risk through increased earn outs and other alternative deal arrangements. And we are seeing a bit of that, but not to the extent expected.
In fact, according to the latest Market Pulse Report sponsored by IBBA and M&A Source, 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.

What we’re seeing in M&A is somewhat mirroring a phenomenon in the home buying market right now. Fewer sellers are listing their homes, but buyer demand is still high. According to data from Zillow, new for-sale listings are down about 25% over a year ago but house values are up 4.3% year-over-year.

To clarify, sellers that are faring well in the M&A market are those who have been relatively unaffected by COVID-19 and 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, we recently took a Northeast Wisconsin business to market and had 43 signed non-disclosure agreements in 2.5 weeks. That’s nearly 10 more vetted, qualified “looks” than we typically receive in twice the time. And within 30 days from going to market, we had four written indications of interest on the table. And in a peer organization of ours in Pennsylvania, one of our association members just sold a company with $4-5 million in EBITDA at an eight-multiple. (That’s a solid two points above the average market peak.) In that deal, the seller is getting 80% cash at close.

So if you’re 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’s easier to get attention right now. Buyers have fewer businesses to consider and they’re 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.

 

By Scott Bushkie