Deals Flatten As Economy Fattens
The marketplace remains strong for sellers and there are still plenty of buyers out there, though perhaps not quite as many as a year ago, said Tom Williams, founder and president of The Charter Group Ltd., a firm that represents both prospective buyers and sellers of companies.
For buyers, the bargains aren’t as good as they were a year ago because a year ago there were economic uncertainties and the banks were more conservative in their lending activity as a result, Williams explained.
The good news is that there seems to be a fairly healthy rebound going on in the marketplace from a revenue and sales standpoint, particularly in wholesale distribution and service industries, he said.
“What that’s doing is increasing the EBIDA (earnings before interest, taxes, depreciation and amortization) of local companies and pushing prices back up a bit.”
Now that banks are seeing business pick up, he said, they’re becoming a little more aggressive on the financing.
At this time last year, Williams estimated the ratio of buyers to sellers was about 20 to 1.
There are many more buyers than sellers in the market right now, in part because during the economic downturn many sellers simply decided to wait until the market improved rather than sell their companies while the multiples were low, said Robert Cummisford CFA, senior valuation analyst with Adamy & Co. PC.
“Well, after about the second quarter of 2003, when we were talking to clients, it was like somebody had turned on a spigot,” Cummisford recalled. “Everybody all of a sudden started talking about how business was picking up, they were returning to profitability and sales were improving.”
They still had their concerns about international issues and jobs going overseas, he added, but by and large what they were seeing was an economy in recovery.
“If the economy continues down the path of economic recovery, it bodes very well for the M&A market because you continue to have buyers out there that are looking, and the profitability and the sales and the numbers that you use against the multiples in these companies are now improving as the economy improves.”
Cummisford said another positive factor is the low interest rate environment. A lot of buyers want to take advantage of the low rates now. Even if interest rates are creeping up, he observed, by historical standards they’re still very low.
Nationally, there has been an increase in the volume of merger and acquisition deals, and Cummisford said his company is also seeing a pickup in businesses looking to acquire new lines of business or new geographic markets.
But Adamy & Co. doesn’t have any statistics on how many deals have actually been struck in Grand Rapids, or West Michigan in general, in recent months.
“Generally there has been an increase in the amount of interest on the buy side,” he said. “A lot of the deals people like to keep very hush-hush. It works well for us because that’s what we believe in, too.”
Williams, too, underscored the confidentiality factor. A seller typically doesn’t want word to get out on the street that he’s interested in selling, because if word does get out, his employees and vendors begin to worry, and then his customers and his lenders begin to worry, he explained.
The displacement of hundreds of top executives has been driving some of the acquisition activity in West Michigan. The downsizing of some of the region’s larger, well-known companies during the past couple years displaced a lot of workers and put a lot of executives back in the job market, he said.
The displacement continues, with Bosch Corp.’s recent closure of its Kentwood plant, another round of layoffs at Steelcase, and Meijer’s downsizing of its white-collar work force.
Some of those out-of-work executives have the talent and the wherewithal to go out and run their own company, Cummisford said, and they are interested. As Williams put it, they are people accustomed to high income, they have money, they have skills and they want to stay in western Michigan.
If the economy continues to recover and the stock market continues to recover, that will be good from a seller’s perspective, Cummisford said.
They’re generally interested in buying small businesses that generate between $1 million to $7 million in annual revenues, he said.
Williams said wholesale distributing businesses have been and continue to be in greatest demand because those businesses don’t have much money invested in fixed assets like buildings and machinery. Service businesses are probably the second in terms of desirability, he said, and manufacturing businesses third.
How long can a strong sellers’ market last? Williams guesses it could persist for perhaps six to nine or more months.
“It’s going to start filling up, though,” he predicted. “I’d say a year or year and a half from now the financial buyers will have bought their business, so the marketplace won’t be as strong.”