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The M&A Market

A recent article that appeared in the Wall Street Journal – ”˜Sold! More Small Businesses Exchanged Hands Last Year’ – is reflective of the business for sale activity we are seeing here in the Chicago market. Our firm has seen a steady increase in business acquisition activity that is rooted in several market forces and, sans a double dip recession or major world event, we believe is a trend that is likely to continue for the next 7 to 10 years.

One of the primary driving forces has been the steadily improving financial performance of many businesses since early 2010. This is the result of significant expense elimination and reduction combined with a steady recovery in top line revenues. In any given year our firm reviews the financials of approximately 450 businesses; the bottom line of many of these businesses is healthier than even their pre-recession performance. This has enabled owners who couldn’t or wouldn’t sell because of depressed valuations to dip their toes back in the business for sale market.

The other trend fueling this rebound is the large numbers of individual and corporate buyers who are seeking acquisition opportunities. Individual buyers have been largely comprised of people who are in a job transition or fearful that they could be a casualty of corporate downsizing. They are motivated to seek an acquisition as an alternative to the traditional job search. Many of the corporate buyers we work with have seen their cash positions stabilize and grow, and see growth thru acquisition as a potentially safer bet versus growing organically in this uncertain economic climate. The combination of high unemployment rates and corporate growth initiatives has resulted in increased demand for quality business acquisitions.

No real recovery in business transactions can possibly take place without bank lending. The Wall Street article cited the improved lending environment as a factor in transaction volume increases and our firm has definitely seen that trend here in Chicago. There has been a steady and concerted effort on the part of several banks to provide acquisition lending. This is good news for all parties in the transaction – Sellers can hope to secure the majority of the selling price at the closing table and buyers can gain maximum leverage by keeping equity infusions to under 30 percent of the total acquisition price. Access to bank lending is hard work and requires that the company have stable financials with solid fundamentals, and the acquirer must have a great credit history with relevant experience. Our firm alone has had over 40 companies pre-qualified by various banks for lending and we just closed our 9th bank financed deal in 4 months – a trend confirmed by other M&A firms. To put this activity into perspective, we only completed 2 bank deals in the previous two years.

Presidential elections typically split the business for sale market into those owners who take a wait and see approach and hope for an improved economic climate post-election, and those who believe they should get out while the getting is good. This election cycle appears to be no different; however we do see one factor this year that is causing owners to go to market now – the expiration of the bush era tax cuts on December 31, 2012. Given the large government deficits, most of the tax professionals we speak with believe that the current tax rates will likely expire and that there will be an increase in both the capital gains and ordinary income rates. Thus, owners who wait until 2013 or beyond will see their net proceeds from a sale decrease if congress allows the current tax law to expire.

Probably the most compelling trend pointing to increases in the business transaction marketplace is the sheer number of baby boomers who own businesses and will be seeking an exit as they approach retirement. This macro trend is well documented but was temporarily sidetracked by the recession. There is no denying, however, that this wave of retiring baby boomer business owners is barreling down the track and the only question is when, not if, they will pull the trigger. Since May 2011, many business advisory firms have experienced a steady increase in the number of baby boomers seeking exit planning advice – the wave is coming. Boomers should pay attention to the timing of their exit as this wave will likely result in a very large supply of businesses coming on the market which will have the effect of driving business values down. Hard to know when this inflection point will occur but when it does buyers will have many more options and a business will need to stand out to maintain value in a flooded market.

We believe the rebound in transactions is here for the foreseeable future, but like the daily roller-coaster in the financial markets the business for sale market will have many of the same maddening aspects.

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