In order to sell a business, it must be attractive to potential buyers.
The title of this blog entry is a quote from an investment banker during a recent conversation about the current M&A market. His point was that it is not a lack of buyers that squeezes today’s M&A market. It is a lack of businesses that buyers want to buy.
To verify the accuracy of his comment, I reached out to several representatives of private equity groups (PEGs) – the most active buyers in today’s M&A Marketplace.
PEGs’ activity in the marketplace is based on three factors. First, most of them are flush with cash and they have to invest the cash they have raised from investors or return it in the relatively near future – the next few years. Further, interest rates remain historically low. Not only do private equity group have an incentive to acquire companies, they have money and they have borrowing capacity.
Good news for sellers, right? That’s not what “the number” would indicate. The number of M&A acquisitions in the first quarter of 2014 was no more than average.
The reason isn’t a lack of buyer interest or investment capital; it is a scarcity of attractive businesses. Consequently, as any private equity manager will likely tell you, buyers have to pay historically high EBITDA multiples. There is simply too much money chasing too few great businesses. And no one, especially professional buyers, likes to pay top dollar.
Here are several comments I’ve heard in the last 12 months from a number of private equity managers:
“A fundamental issue for us is growth: Does a business have growth potential? If a seller can demonstrate that growth is sustainable, we are open to paying a premium.” PEGs do not define “demonstrate” as a financial projection on an Excel spreadsheet. They want a written growth plan clearly tied to historical growth numbers.”
“We look for management that does not depend on a small number of people.”
“We look for companies with processes that are documented and repeatable so that the business runs smoothly no matter who owns it.”
“We are only interested in ‘Best Of Class Operators’ in their niche.”
“We look at about 3,000 (not a typo) deals for every ten we pursue and every one we buy.”
“I like to see companies whose sustainable revenue is based on activities that are not ‘easily commoditize-able’.”
The conclusions I draw from the buying community are these:
- Buyers are not happy with today’s M&A marketplace. They have to pay too much money for desirable companies. This is good news for you if you’re thinking of selling, but only if you have a “desirable” company.
- PEGs don’t want owner-centric companies. They believe that profitability only continues when there is both deep management talent and repeatable processes.
- Your company must demonstrate a history of growing sustainable, non-commoditize-able revenue and profitability.
- Buyers insist on “best of class operators” because of the high multiples they must pay and the consequent long time-period needed to recover their purchase price. Therefore revenue and profitability need to be growing and sustainable and not subject to outside risk commoditization.
Theoretically, more buyers than sellers in the marketplace should create a “sellers’ market.” Realistically, that’s only true if you are selling a desirable, Best-In-Class company. If yours doesn’t meet that definition today, you’ve got work to do and I suggest you do it before your competitors make their companies more attractive than yours to this important buying group.
