SELLING YOUR BUSINESS – THE 2006 M&A OUTLOOK By David M. Kauppi, CBI, President MidMarket Capital Advisors, LLC
(click here for PDF)
Wall Street reported a banner year for Mergers and Acquisitions activity with corporate coffers
bursting with excess cash. It seemed like every large company deployed this capital in one of
three ways; a stock buy back, an increase in dividends, or an acquisition. All three activities
represent a vote of confidence in the future growth of the economy. Our economy has
demonstrated incredible resilience in barely missing a beat during a series of devastating natural
disasters and a huge run up in energy costs. Nothing on the immediate horizon will interfere with
this growth in 2006. How does this affect the owners of family businesses?
We are just beginning the well-documented cycle of the retirement of the baby boomers. The
baby boomers generation started and grew hundreds of thousands of successful privately held
businesses. Those owners are facing retirement as well and are faced with the difficult decision of
how to retire and exit their business. Having capable and well trained heirs involved in the
business is the easiest exit. You combine gifting and buyout to achieve liquidity for the parents
while allowing the next generation to continue the business. Statistics show that only one-third of
all family businesses are successfully transferred to the next generation and only 13% are
transferred onto the third generation. My feeling is that these percentages are decreasing over
time. We therefore are entering the perfect storm for mid-market M&A from the supply side.
Over the next 10 years we will see a huge increase in the available businesses for sale.
Economics 101 would tell us that with a glut of supply comes an erosion of prices. To the extent
that your business is a commodity type, me-too, not differentiated, low margin business, you will
be hard pressed to get aggressive multiples when you sell. That will be somewhat offset by the
demand of larger companies in the same industry feeling optimistic about the economy and
having available capital from profits to spend. Most industry roll-ups were entered with great
promise, but for the most part were poorly executed. The buyers paid way too much in the
feeding frenzy to grow market share – look at the waste management, electrical and HVAC, and
equipment rental markets as examples of low performing roll-ups. The second major mistake was
overestimating the synergies that should be achieved with size. The good news is that history is a
good teacher and the industry consolidators are much better at it. You may not get an outrageous
multiple, but you have a better chance of receiving future value from any portion of your deal that
is in the form of company stock or performance based earn-out.
The good news is that attractive companies are very much in demand by both corporate buyers
and Private Equity Groups. There is a lot of money waiting to be deployed. These folks with this
money recognize what characteristics make a company attractive and may bid up the price in a
competitive environment. Some of the characteristics they are looking for are unique market
niche, barriers to entry, high margin, scalability of technology, proprietary technology,
contractually recurring revenue, a strong management team and customer and product diversity.
Grade your company in those areas. If you have some weaknesses, address them and your exit
will be a lot more financially rewarding. 2006 will be a very good year to sell a strong company.
Dave Kauppi is a Merger Acquisition Advisor with MidMarket Capital Advisors, LLC. MMC is a business broker
firm focused on middle market corporate clients. We provide M&A and divestiture, succession planning,
and valuations. Dave is a Certified Business Intermediary (CBI), a licensed business broker, a Certified
Estate Advisor (CEA) and a member of IBBA and the MBBI. Contact (630) 325-0123,
davekauppi@midmarkcap.com or www.midmarkcap.com. |
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