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Lower Middle-Market M&A Activity

By Generational Equity

10/17/2016

The business press over the past several months has begun discussing what they are calling a general softening in the M&A market. Although this may be true for billion-dollar, mega mergers that are much harder to finance due to regulatory issues affecting lenders, we are seeing the opposite in the lower middle-market: Activity is on par, if not stronger than last year.

In fact, even though 2015 was a record year for deals completed for Generational Equity, we are on pace today to surpass our record year in 2016!

Lest you think we are an anomaly in the lower middle-market (loosely defined as companies valued below $100 million), I provide you with additional proof in the form of an interview that Mary Kathleen Flynn of Mergers and Acquisitions Magazine recently conducted with another player in our niche. Here are some excerpts from this interview, Lower Middle Market is Speeding Up, which Mergers and Acquisitions summarized in this sentence:

More entrepreneurs are coming to the table and heating up the lower middle market, says Ramsey Goodrich of Carter Morse & Mathias.

And Ramsey’s words:

Good valuations in the market place is what we are seeing too.

Normally entrepreneurs are a year, or a year and one-half behind (market) reality. But buyers are looking forward – two, three and five years – and are saying the economy is still good; we are confident about financing and sellers are usually a couple of years behind. But we have hit equilibrium where buyers are still paying high multiples and sellers are finally realizing that.

If Mr. Goodrich is correct (and we believe he is), the best time to sell is when the market is in “equilibrium,” as he describes it. This is where the factors driving demand (buyers) and the reality of the market are driving sellers forward at the same time.

We believe that this is where we are in the current market cycle. The problem buyers are facing is simply a lack of good deals to examine and acquire. The wise entrepreneur realizes that this is a great time to diversify because:

  • Buyers are very active and
  • The vast majority of an owner’s net worth is tied up in one highly illiquid asset.

It is this last point that is vital. Far too many issues are out of your control. Now I know that most business owners are classic Type-A personalities and believe that they literally can control everything. It is the wise entrepreneur that realizes the opposite is true.

So the question we ask every business owner is this: Where are you on the risk vs. reward continuum? Has the risk of the downside started to outweigh the reward?

Many of you are paying yourself handsomely from the business and you are able to write off 3-4 vacations a year, the boat, the car for the spouse, and so you are doing well. And you probably have 3-4 good years of earnings now post-recession, so the reward is high. However, let’s consider 2008 and 2009 and the impact the Great Recession (which was never supposed to happen again) had on your business. And where are we now in the economic cycle? What will happen post-election? What is the Fed going to do with interest rates? Not to mention the geo-political tensions that are an all-time high.

Here is the good news: As mentioned, buyers are looking for well-run businesses right now. But what is most exciting is this – if they can’t find them, they are also looking for companies with upside potential for long term growth – firms that are usually under-capitalized, are lacking in sales and marketing programs, and simply need managerial insight and financial controls/reporting.

Again, the seller’s market continues in the lower middle-market. If you are at a point where you are ready to talk to a professional M&A advisor about your situation, goals, and dreams, please reach out to us and we will be glad to determine if you are a good fit for our services. You can do so here:

And if you would like to see the entire interview with Mr. Goodrich, you can do so here: Lower Middle Market is Speeding Up.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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