Lots Of Capital Looking For Deals

October 8, 2002
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GRAND RAPIDS — Tom Williams has news for people who think that all the capital in the country has dried up in the last two years.

Williams, founder and president of the Charter Group  — a firm that does mid-sized mergers and acquisitions — puts it succinctly. “There’s a lot of money out there.”

He said the money is cash belonging to investment groups that’s drawing very small rates of interest.

“They’re looking for a place to invest and they’re being very aggressive about it,” Williams said.

He said he believes it’s a popular misconception that money for acquisitions has dried up. The impression arises, he believes, from sharp reductions among the country’s big firms. “If you look at the large, publicly traded companies — the GEs and the Ciscos — the M&A activity is certainly down.

“But in the middle market,” Williams added, “the activity is greater than I’ve seen in years. It’s exceptionally strong.” He said large numbers of investment groups are looking for places to put their cash to work for them.

Williams defined middle market transactions as in the $3 million to $4 million range up to $20 million.

“These aren’t the big ones,” he said, “but the kind of thing you expect to see in the West Michigan area. They would be the family-owned businesses that have been around 20 years, and maybe there’s no succession planning or there may not be someone to take it over.”

Oft times, too, he told the Business Journal, firms that are candidates for acquisition are owned by baby-boomers in their late 50s who’ve built up equity in a business and now want to cash it in.

“These are people who are still young enough that they want to have some fun and enjoy life,” he said. “Say they’ve bought that place down in Florida and they want to get some use out of it. Or they want to go out west and ski, or devote themselves to missionary work, or anything of that sort.”

Because of mistaken impressions about the economy, Williams said, he thinks many people in those positions think that a sale currently is out of the question.

“A lot of sellers are sitting back there saying, ‘This is a lousy time to try to sell my business,’ but it’s probably one of the best opportunities they’ll see in the next several years.”

He elaborated by adding, “I don’t think it would be unrealistic if we said that at the present moment there’s probably 10 to 15 times as many buyers as sellers. The market is exceptionally strong and the rates are the best in years.”

He said two things are driving the market.

The first, he said, is that downsizing has, in a sense, stranded a goodly number of senior management people accustomed to earning $150,000 a year and a lot of benefits.

“So they live out in Ada or on Mountain Ridge, and they’ve got two cars and three kids and one about ready to go into college.

“And they’re committed to West Michigan and they want to live here and they’re established here, and they’re looking to buying a smaller-transaction size business: $3 million or $4 million or $5 million.”

He said the mid-sized M&A market right now is strong for the buyers’ side.

“ It’s not as strong for the sell side because some of the businesses have not done as well in the last year and a half, so that earnings may be down, and that does affect value.”

The other factor driving the market, he said, is that a lot of private investment groups have a lot of cash on hand and they’re receiving very low interest rates from all the cash they have in their market accounts.

He said the name of the game is the deal. “The whole thing is driven by the deal. If the deal is there, there’s a buyer and there’s financing.”

As far as financing is concerned, he said, the buyer must show that he has a track record of success in business.

“Give me a guy who was a president of a division of a major manufacturer — and if he’s got $500,000 of his own and can find a company he wants to buy, we can put it together for him. There’s lots and lots of money available.”

He noted that traditional banks currently are being conservative in their advancing formulas.

“They see softness out there,” he said. “So whereas a year ago they might have advanced 85 percent of receivables, now they’re only advancing 75 percent of receivables. So where a bank might have advanced, say, $2 million on a $3 million deal last year, now they’re only going to put in $1.5 million or $1.25 million.

“So the deal is requiring a little more equity contribution from this individual or from a private equity fund, or a mezzanine lender, so you have to structure the deal a lot more.”

He jokingly defined mezzanine lending as airball financing. “In other words, it’s good will or blue sky financing, financing that would be over and above what a bank would advance upon values of assets.

“Basically, it means a shorter pay-out period than a bank offers and a higher interest rate because there’s more risk.”

He said mezzanine finance — whether offered by a bank’s mezzanine finance department or a group of outside investors — is very, very aggressive right now.

“It still has to be a good deal,” Williams stressed. “But they have a lot of cash on hand and they want to put it to work.”

Williams outlined the work of the Charter Group (located in the Comerica Bank Building at 99 Monroe Ave.) basically as undertaking everything from due diligence investigations to assembling the finance package to dotting the lines upon which buyers, sellers and lenders affix their signatures.

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