Now is the time to buy or sell a business
An M&A expert says three good years of business and low interest rates are a magic combo.
“Right now is the perfect market” for selling or buying a business, according to Randy Rua of Rua Associates.
Of course, he is in the mergers and acquisitions business, so he might be expected to say that, but he provides convincing testimony that this could be an ideal era for M&As, especially compared to a few years ago.
“Right now is the perfect market,” he told the Business Journal, adding, “I wouldn’t wait too much longer because we know interest rates are going to go up.”
Rua Associates is an M&A firm founded four and a half years ago. Its lead office is in Zeeland and it has another office near downtown Grand Rapids, with a total of 16 employees.
The firm regularly offers informational presentations for business people interested in buying or selling a business, with the next session being Tuesday morning at GVSU’s Seidman College of Business in Grand Rapids. “Preparing to Buy a Business” features a panel of speakers including Doug Holtrop, senior vice president at Mercantile Bank; Rua, president of Rua Associates; Jon Siebers, an M&A attorney and shareholder at Smith Haughey Rice & Roegge; and Dan Slate, a partner at H&S Companies, an accounting and business consulting firm.
Topics will include current market demand, common issues at each step, evaluating a potential opportunity, capital structures, legal documents involved and more.
“We’re seeing a lot of activity,” replied Rua when asked about the current market. “The demand is very strong.”
In the past, he said, often there were just one or two offers from potential buyers after they had been screened by the seller; now there may be from six to 10.
“The challenge is how to narrow it down to find the right buyer,” said Rua.
Over the past year there also has been an apparent increase in the number of business owners trying to facilitate an internal sale of the business to the management team or the employees. Rua said banks are tending to drive the internal transactions when they know of a key employee who is interested in taking over the company.
“They will help him,” noted Rua.
In the aftermath of the recession, everyone — buyers, sellers and banks — were extremely cautious, with much continuing uncertainty about the future amid evident weakness in the economy. Some businesses continued to experience occasional bad years for sales while the situation continued to fluctuate, and three years ago it was almost impossible to sell a business without the seller financing up to 30 percent of the purchase price, according to Rua.
Now, M&A professionals are consistently seeing interested sellers whose businesses have completed three good years financially — “and that’s the magic number because banks go on three years,” said Rua.
Uncertainty about the future also seems to have waned, with fewer fears of a repeat recession, according to Rua. That had many interested buyers “tiptoeing” into deals three years ago, but Rua said he hasn’t heard anyone over the past year mention being afraid of a repeat recession.
The record low interest rates obviously grease the skids under potential sales, but Rua said the large number of bankers with whom his firm is in frequent contact are making it clear rates will be going up.
“Banks are planning on it,” he said.
Many companies had cut back investments in their businesses during the recession and, as a precaution, began saving money instead. Now some are sitting on a lot of cash — meaning they may not need to borrow much if they decide to acquire another business.
“We’ve seen a lot of cash transactions with sellers not having to finance” the deal for their buyer, said Rua.
The low financing costs and the new aggressive outlook among buyers has brought the level of M&A activity to “the highest I’ve seen since I’ve been in the business, and that’s been 10 years,” said Rua.
Ironically, some owners with an interest in selling out are stalling. “Now that things are better, they say, ‘Well, it’s going to keep growing.’”
Another factor might tend to make owners less prone to sell the business right now: It’s a lot more pleasant to own and manage a business in good times than in bad.
“It’s the perfect market, but I really think there are going to be a lot of sellers who are not going to take advantage of it” before it is too late, said Rua.
Many aging business owners who might have sold out several years ago changed their minds as the recession set in and the value of their business shrank. Rua said he believes many business owners today who are in their 60s and 70s are finally ready to act.
He maintains that successful transitions in business ownership are an important factor in a healthy economy. “The next 10 years will be critical” for the economic health of Michigan, he added.
Before founding Rua Associates, Rua spent about six years at two area firms heavily engaged in M&A activity: Charter Group (now called Charter Capital Partners) and NuVescor. He was mainly engaged in transactions.
Rua Associates went into business as a business exit planning and valuation consultant. However, he got many referrals for making transactions happen “so that ended up being the largest part of our business.”
He said that in the M&A industry, attempts to sell a business are only successful about 25 percent of the time, but Rua Associates has a success rate closer to 80 percent because its clients are required to invest in a preliminary planning stage to avoid the major issues that prevent a deal from closing.
The failure rate could be reduced “if people did some planning” at the start, he said, “but I found that no one wants to take the time or pay for the planning. They just let (the property) go right to market.”
Rua said most business brokers do not offer clients any planning services, but Rua Associates requires advance planning. The charge is $8,000 for the advance planning and some basic prep work — services he said normally cost as much as $60,000.
“We make our money on a success fee,” he added.
Rua said 90 percent of the firm’s business is based in West Michigan and is focused on smaller companies than those served by the larger M&A firms.
For more information about Rua Associates and its educational seminars, send an email to info at ruaassociates dot com or phone (616) 741-9344