Timing the sale of a company can certainly be a tricky decision. You don’t want to sell too soon, and you don’t want to sell too late either. In both scenarios, you risk leaving money on the table if the timing isn’t right. So what is a business owner to do?READ MORE >>
Benchmark International is pleased to announce the transaction between Regatta Real Estate Management Inc (“Regatta”) and Fyve, LLC (“Fyve”).
Founded in 1994, Regatta is a Florida-based business headquartered in Miami. The company is a full-service real estate property management provider specializing in association management, investment property management, and condo conversions. Throughout its operating history, the company has remained focused on the small business, customer service-oriented approach.
Fyve is a nationwide, full-service real estate management solutions company that is redefining the experience for owners, residents, and tenants. Prior to the acquisition, Fyve had 11 locations across six states. With this acquisition, they will be able to reach into the Miami market and expand their Florida operations.
Senior Deal Associate Nick Woodyard at Benchmark International added, “It is always great seeing two companies come together where both parties can substantially benefit. It was a pleasure working with Tim and the Fyve team throughout the transaction. On behalf of Benchmark International, we wish both parties continued success.”
On April 30th, 2021, Benchmark International facilitated the sale of CPR Plus, LLC (serving the Greater St. Louis area) to Allied 100, LLC of Madison, WI.
The seller, CPR Plus, provides life-saving skills training to more than 100,000 individuals for close to 30 years in the St. Louis area. Their comprehensive and convenient CPR training courses are accredited by the American Heart Association and administered by friendly instructors with extensive experience.
As anyone who has ever done it before will tell you, buying a company is a process. It can take anywhere from a few months to a couple of years to complete. To reduce uncertainties and understand the business as much as possible, buyers must conduct thorough due diligence and ask the right questions. Finances, potential synergy, liabilities, customer relationships, and key employees are just a few areas that the buyer should consider.
Here are five essential questions buyers should ask during management meetings when acquiring a company.
1. Why is now the best time for you to sell your business?READ MORE >>
In the GAMECHANGERS (ACQ5) 2021 GLOBAL AWARDS, Gregory P. Jackson, CEO of Benchmark International, has been named CEO of The Year in the area of Corporate Finance.
The ACQ is a leading corporate news publication serving the sector since 2003, with a global audience of more than 261,000 subscribers. The GAMECHANGERS (ACQ5) GLOBAL AWARDS celebrate achievement, innovation, and brilliance, recognizing the world's most outstanding organizations and professionals.
The acquisition process can understandably be a very daunting task for sellers, let alone an uncomfortable experience that pulls back the curtains on their business and its most intimate information. Many sellers realize this is not their area of expertise and will make the informed decision to contract with a sell-side M&A advisory firm before officially entering the marketplace. The M&A advisory represents the seller, but can function as your ally as a buyer if you let them because they have incentive to get a deal done. Although M&A advisors can guide a seller through the sales process and educate them on market norms, they’re not capable of self-fabricating the comfort level between buyer and seller. Over time, a seller’s relationship with a potential buyer will prove to be most advantageous in getting to the finish line of a transaction, as there will be numerous items both sides will have to work through together. Unfortunately, agreements can fall apart due to a lack of mutual comfort between the buyer and seller, and this is typically a result of a combination of multiple factors set in motion long before official due diligence even began. The following are steps you should consider when working side by side with a seller during the transaction life cycle.READ MORE >>
It’s no surprise that the COVID-19 pandemic slowed M&A deal activity overall in 2020. According to data from PitchBook, more than 2,000 transactions closed for a value of $336.8 billion in Q2 of last year. That represents a 41 percent decline in the number of deals from Q1. Yet, deals did pick up in the second half of the year, which is likely to continue, as businesses are poised for improved economic conditions that leave COVID-19 in the rearview mirror.READ MORE >>
Benchmark International is pleased to announce the transaction between ASAP Group (“ASAP”) and Terratest Group (“Terratest”).
Founded in 2006, ASAP is a leading foundation company specializing in a broad variety of shoring and foundation support methods, with a unique patented Sheetpiler™ technology that makes ASAP one of the premier shoring companies in Florida.
The value of a company extends beyond the amount of revenue it generates. As a business owner, you should be monitoring the value of your company at all times, but it is especially important if you are considering exiting or retiring within the next several years, or even up to a decade from now.
Company valuations are based on far more factors than just financial statements and multiples. The process involves the forecasting of the future of the business based on several key value drivers. Sometimes these can be sector-specific, but there are many core drivers that apply to any type of business, as outlined below.READ MORE >>
Working capital, also referred to as net working capital, is the measure of a company's liquidity, operational efficiency, and short-term financial status. It is the difference between a business’s current assets, its inventory of materials and goods, and its existing liabilities. Net operating working capital is the difference between current assets and non-interest-bearing current liabilities. Typically, they are both calculated similarly, by deducting current liabilities from the current assets. So, essentially, if a business’s current assets total $500,000 and its current liabilities are $100,000, then its working capital is $400,000. But there are a few variations on the calculation formula based on what a financial analyst wants to include or exclude:READ MORE >>
What Does It Take to Complete 52 Transactions in 52 Weeks?
2020 brought us all a huge amount of uncertainty. From an unexpected global pandemic to an election year, business owners tooling with the idea of a transaction were skeptical of success and market interest. With immense challenges presenting themselves, Benchmark International US offices took the year by the horns and hit another record year of completed transactions.
Following their 2019 accomplishment of 40 successful deals, Benchmark International’s US transaction teams saw the opportunity to take it one step further, completing 52 domestic deals. This is a 33% growth rate in the midst of one of the most trying economic environments to date.
The question here is: What does it take to complete an average of one deal per week, every week, in the midst of a global pandemic?
Keep the Consistency
The five US transaction teams showed consistency when working with our clients, no matter the deal size or time on market. Being industry agnostic allowed Benchmark International to bring a wide range of companies to market in 2020; from quick deals to major transactions, the team displayed prodigious work ethic to find the perfect fit for their clients.
COVID-19 tested global corporate environments, but Benchmark International adapted to the temporary work from home changes with ease. Distractions while working from home could have easily altered the company's success, but with virtual communication and determination to find the best for our clients, the team proved resilient. Benchmark International’s 2019 modernization of its tech systems, from top to bottom, paid off handsomely. A new CRM, the move to cloud-based storage, and widespread adoption of Microsoft Teams for inter-office communications all occurred in the first months of 2020, just in time to a two-month work from home period, a minor annoyance as opposed to a hinderance.
Both buyers and sellers saw a shift in focus when COVID-19 hit challenging the way M&A firms traditionally go about business. It took tedious due diligence amongst the five transaction teams to ensure the value of the companies represented was preserved.
2020 financial concerns are guaranteed to be on business owners' minds when moving into conversations regarding a full/partial sale in 2021. There is not yet a "market standard" on COVID-19 "add backs." However, owing to the breadth of its transaction experience both domestically and globally over the last year, Benchmark International is helping to shape that emerging standard, pushing for fairness to sellers wherever possible and reminding buyers that their true interest lies in determining how the business will perform under normal circumstances..
Stick True to the Foundation of Benchmark International
Benchmark International was formed on the ideology that every business is a family business. The dedication demonstrated by everyone at the firm (from analysts to directors to executive leadership) is what stands this team apart from their competitors. Sticking to the robust business model originally set forth by the founders, Benchmark International was ready and able to handle challenges that were unrecognizable prior to the year 2020.
As Benchmark International continues to set records statewide, the notable accomplishments extend beyond that; for SIX years in a row, the company as a whole completed 100+ transactions per year. This shows that geographical location, although important, doesn't outweigh work ethic, consistency, and resilience amongst a team like Benchmark International.READ MORE >>
How Private Equity Works
Private equity firms raise financing from institutions and individuals and then invest those funds into the buying and selling of businesses. Once a pre-specified amount is raised, the fund closes to new investors and is liquidated. All of the fund’s businesses are sold within a set timeframe that is typically less than ten years. The more successfully a PE firm’s funds perform, the better its ability to raise money in the future.
PE firms do accept some limitations on their use of investments under fund management contracts, such as the size of any single business investment. Once the money has been committed, investors have nearly zero control over its management, unlike a public company’s board of directors.
The leaders of the companies within a private equity portfolio are not members of the PE firm’s management. Private equity firms control its portfolio companies through representation on the boards of those companies. It is common for a PE firm to ask the CEO and other business leaders in their portfolios to invest personally. This offers a way to ensure their level of commitment and motivation. In return, the operating managers can get significant rewards that are linked to profits when the company is sold.
With large buyouts, PE funds usually charge investors a fee of around 1.5 to 2 percent of assets under management, plus 20 percent of all profits (subject to achieving a minimum rate of return). Fund mostly profit through capital gains on the sale of portfolio companies.
How Private Equity Improves ValueREAD MORE >>
As a business owner considering the sale of your company, you may be asking yourself, “When is the right time to sell?” The answer is simple. The time is now.
The global recovery is underway, and 2021 has given us several reasons to be highly optimistic, and these reasons are why you should take action.READ MORE >>
The Beginning of the End
The turbulent year of 2020 is finally in our rearview mirror. While so many lives have been lost and everyday life is still far from normal, effective vaccines for COVID-19 are being distributed, offering hope for a near-term end to the disruption we’ve endured for the past year.
Markets have begun to respond with optimism for the highly anticipated return to normal, but we’re not at the finish line quite yet. Mass distribution of the vaccine will take time, and people and businesses are still suffering as the virus is spreading at record-high levels and restrictions are being reinforced. This means that, yes, our world remains suspended in a state of uncertainty, but we have good reason to believe that the global economy will continue to recover, and mergers and acquisitions will lead the recovery. Research indicates that 53 percent of US executives plan to increase M&A investment in 2021. Some sectors have fared rather well during the pandemic. But how well—and how quickly—the overall economy recovers will depend on factors such as virus containment, fiscal and monetary policy, and inflation.
Virus containment remains the main priority for economic recovery to succeed. However, there are other possible risks to market performance. A lack of adequate policy support could occur due to concerns about mounting government debt. The technology conflict between the US and China is likely to continue even under a more traditional Biden administration, and the impacts are expected to take years to manifest. The decisions made by the two countries will affect regional economies and the businesses that operate within them. Other geopolitical factors could also shift investor attention away from recovery, but they are considered rather unlikely at this time.READ MORE >>
Many business owners believe that enlisting an expert in their industry is the right way to go when selling their companies. But if you want to rake in the most value for your business, there’s a better way.
There is no question that mergers and acquisitions are complicated and subject to constantly changing market conditions and industry trends. An industry expert might know plenty about a particular industry, but they are not experts on selling and buying businesses. A mergers and acquisitions firm is.READ MORE >>
It is not uncommon for a company acquisition to be viewed as a simple transaction that means transferring the business from one owner to another. But rather than just allowing the business to simply carry on as is under new leadership, a merger or acquisition should be viewed as a solid strategy to boost the company’s overall health, productivity, and bottom line. While M&A transactions can serve as great solutions for exit strategies, they can be so much more than that. M&A should be regarded as a powerful tactical opportunity.
Often times, M&A deals are considered to be a way to get out and cash out with instant gratification. But what else might be possible when a deal is carefully crafted to deliver sustainable returns and support a powerful legacy for the business in the long-term? M&A done right can translate into great success for a company and, ultimately, its leadership.READ MORE >>
No one knows for sure how much longer the COVID-19 pandemic will be affecting our lives and our businesses. But we do know that mergers and acquisitions are still happening, deal activity will pick up, and the way we approach due diligence in a post-COVID world has the power to make major differences when it comes to selling a company. While there are new obstacles to consider, there are also significant opportunities to identify and create value, and help companies outperform the market.
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In the printing and packaging sectors, M&A activity has slowed since August of 2019 with around 14 percent fewer deals closing. Deal activity was strong at the beginning of 2020, and then the COVID-19 pandemic brought everything to a standstill in the spring, with activity starting to return to normal in late summer. In fact, there were 16 transactions in August, which happens to be the same number as August of 2019.
The pandemic has made it more challenging to complete deals because of social distancing and how it impacts personal relationships, but buyers have not lost their strategic focus. The packaging side of the business has shown a heightened level of interest in labels, corrugated cartons, and folding cartons. Private equity and large corporate investors remain in the game. There is increased interest in flexible packaging, but the number of these transactions has been limited by the availability of target businesses in this segment.
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During the first half of 2020, M&A activity in the automotive industry was down from previous years due to uncertainty stemming from the COVID-19 pandemic, with cross-border deals becoming more complex. However, the pandemic also resulted in new opportunities for consolidation within the industry.
There were $11.9 billion in M&A deals, which represented a 54.8% decrease in value compared to the first half of 2019. Most investments were in the pursuit of CASE (Connected, Autonomous, Shared, Electrified) technologies. This type of tech is predicted to drive M&A through the end of 2020. Dealmakers are expected to concentrate on securing supply chains and increasing resiliency rather than expanding globally.
Global Deal Activity
The majority of deal value in volume in the first half of 2020 took place in Asia and Oceania, followed by North America. The largest automotive transaction in the first half of the year was valued at $2.9 billion, with Traton SE, a vehicle-manufacturing subsidiary of Volkswagen AG, acquiring Navistar International Corporation. Volkswagen Group China continued to strengthen its electrification strategy by making two acquisitions valued at more than $1 billion each: Gotion High-tech Co. and JAC Volkswagen Automotive Company.READ MORE >>
The right time to retire is going to be different for everyone based on individual circumstances and goals. While finances are obviously a major factor in the decision, being emotionally and mentally ready is equally important. Here are some points you should consider if you are thinking about embarking on retirement.
Retirement hinges upon having the appropriate income to support a comfortable lifestyle in the future. This entails having an accurate and realistic picture of what your expenses will be and how much you will need in order to cover them, including income from your savings, pensions, social security, 401ks, IRAs, and any other assets. The earlier you plan to retire, the more significant your nest egg will need to be. Waiting a few years can help you build up more financial security through tax-advantage investment accounts. So if you love what you do, a later retirement means that you can continue doing it while you shore up your savings for the future. A common algorithm for retirement planning is to have savings that are 25 times the amount of your annual expenses.
When heading into retirement, it is advised that you make sure you do not have outstanding debt in the form of high-interest credit cards and outstanding loans aside from a mortgage or car financing, which can be taken into account for your needed expenses. By eliminating debt, your retirement income can be used for current expenses instead of past expenses and offer you added peace of mind.
While there is no way to be sure what the future holds, if there are signs of an economic downturn, you may want to hold off on the retirement plans for a bit. This will give the markets time to recover, which will help you recoup your invested assets and retire with a better bottom line.
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The most expensive mistake in selling a business is to undersell it. A qualified intermediary can add significant value to a transaction simply by virtue of experience.
Putting this into context, buyers are fit for transactions, they conclude deals in multiple jurisdictions and often have dedicated teams that focus exclusively on mergers and acquisitions. Business owners may typically have done a transaction or even two in their careers, but most often they have not yet sold a business and can benefit enormously by having a seasoned sell-side advisor on their team.
Whilst there are very broad categories of advisor; no two intermediaries are the same. In selecting an advisor there are some fundamental questions to ask that will help establish whether the firm will meet your specific needs and requirements.
1. Who will manage my deal?READ MORE >>
Benchmark International is proud to be a part of the 2020 OCFO Founders Conference, taking place virtually, during Global Entrepreneurship Week on 19th November 2020.
As part of the event, Dustin Graham, Managing Partner of Transactions for Benchmark International's South African offices, will be speaking on the topic Building Your Business For Sale.
Topic: Building for Sale, 14:40–15:00 – Dustin Graham
Event date and time: 19th November 2020, 13:00–16:00
Location: Virtual event
Link to register and ticket sales: https://zcu.io/1od4
Link to event agenda: https://www.foundersevents.co.za/agenda/
OCFO Founders Conference Annual Event
The annual Founders Conference normally takes place in the heart of beautiful Cape Town during Global Entrepreneurship Week. However, in the light of Covid-19, It was decided to host the Founders Conference as a virtual event this year.
The conference brings together top business people, investors, and entrepreneurs in South Africa for powerful networking, learning, and inspiration. The Founders Conference is one of the biggest gatherings of entrepreneurs on the African continent—not to be missed by any serious founder. Speakers include some of the most successful founders around the globe and investors who have raised and invested billions.READ MORE >>
Strategic partnerships or alliances can be very effective business tools and are important to the health and growth of a company. They can enhance capabilities, and open up shared access to new markets, channels, intellectual property and lowered risk. But they can also be complex. Once you form this type of partnership, it takes some effort to maintain it and ensure that it is a win-win for both parties involved. By taking the right steps and having a clear vision for your long-term strategic partnership, you can help it create value, thrive, and boost your business.
Narrow Your Focus
There are many businesses that you could form a partnership with, but you have to narrow it down to what makes the most sense. What partners serve similar customer bases that make sense? For example, if you have a landscaping business, consider partnering with a nursery or a landscaping supply company. You’ll be serving the same buyer and can pass on referrals while streamlining the process and relationship for the customer.
See Both Sides
A strategic partnership, like any relationship, needs to work for both sides in order for it to flourish and yield mutual benefits. When you’re pitching the alliance to a potential partner, consider the benefits for them and present them clearly.READ MORE >>
We have also included handouts that go along with this webinar for you to download and view at your convenience. Please see the handouts below:
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Culture Affects the Bottom Line
When a company demonstrates that it’s thriving with happy and motivated talent, it is more likely to garner a higher business valuation when going to market for a merger or acquisition.
There is a proven link between culture, employees, productivity, and profit. Research shows that:
- Businesses with satisfied employeeshave been noted to outperform competitors by 20 percent.
- Happiness leads to a 12 percent boost in productivity and companies with strong cultures see a 43 percent increasein revenue growth.
- When employees are engaged, absenteeism falls 41 percent, productivity rises by 17 percent, and turnover is cut by 24 percent.
Exit planning is how business owners prepare to depart from their private company and maximize its value through a merger or acquisition to increase shareholder value or transition the company to serve other objectives. It basically arranges for you to leave your company on your own terms. Unfortunately, many business owners do not recognize the value in professional exit planning because they do not see their company from the perspective of a potential buyer, resulting in significant loss of value when exiting the business.
A solid exit plan clearly defines the business owner’s objectives, and lays out a comprehensive strategy that accounts for all personal, business, financial, legal, and taxation aspects of reaching those objectives, including leadership succession and the future of the business. These objectives include the maximization of value, mitigation of risk, conducting an expedient transaction, and finding the right investor to take over the business in its best interests. The strategy may also cover worst-case scenarios, such as illness or death of the business owner. Quality exit planning usually should take place around 10 years prior to transitioning the business, to allow for value strategies to flourish.
Why It’s So Important
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Dustin Graham, Managing Partner at Benchmark International, Cape Town, virtually chatted to innovators and business owners about the critically necessary planning for their exit and their worth at the recent SA Innovation Summit.
The SA Innovation Summit is the largest startup event in Africa, and brings together top entrepreneurs, investors, corporates, and thought leaders to inspire sustained economic growth across Africa. The Summit provides various platforms for developing and showcasing African innovation, as well as facilitating thought-leadership.
The interaction between Dustin and Jonathan Smit, founder of PayFast, is well worth a listen.
As the world still faces the COVID-19 pandemic, businesses in the financial services sectors are preparing themselves for life after coronavirus. This includes the management of credit risk for borrowers, and turning to digital strategies to drive revenue growth.
Insurance and Innovation
The COVID-19 pandemic is forcing the entire insurance sector to implement and leverage digital platforms that enhance customer experiences as a key part of their business strategies in a transformed world in which people are working remotely and driving their vehicles less often. The pandemic has led insurance companies to implement premium relief efforts, offer payment deferral plans, and expand coverage, but these companies are also turning to more digital strategies, emphasizing online customer experiences at a time when more and more transactions occur online versus in person. Consumers are demanding new products such as cyber insurance, more modern life insurance options, and usage-based car insurance. Middle-market insurance companies have always been a bit technologically behind the big players, but they now must adopt new innovations in order to merely keep up with convenience, simplicity, mobility, and modern interfaces that customers have come to expect.
Banking and Lending
Financial institutions are in a position where they need to understand borrowers’ needs and current financial states more than ever. They must also find new ways to measure performance through the rest of 2020. They have already provided assistance to many small and mid-size businesses during the crisis, some of which will be forgiven. Loan modifications have been provided to help businesses survive, and there is likely to be some loan losses. As the economy begins to recover, banks will be able to get a better understanding of borrowers’ financial states, knowing that it will take some time for businesses to bounce back. Deciding whether to lend more credit will be a difficult decision for financial institutions, especially for harder hit sectors such as hospitality and retail. Understanding the recovery of these industries as a whole will be critical through the use of data and payment activity monitoring.
Family offices are private wealth management firms that serve high-net-worth individuals and their families by offering a total outsourced solution to managing finances and investments. There are nearly 2000 of these types of firms around the world, with more than half in the U.S.
These firms have typically relied on physical offices to conduct business. Now in the wake of COVID-19, a shift to virtual family offices has become a necessity during a time where remote work has become commonplace. This has been a challenge for many family offices because most simply do not have the appropriate technology and infrastructure to result in a seamless transition to a virtual office. These businesses will be forced to evolve technologically into the rest of 2020 and beyond. As outdated technology is replaced with better performing innovations, family offices will become more mobile and agile, as well as better equipped with more adequate cybersecurity. Connectivity is also a timely issue, as Millennials will be inheriting family wealth in the future and they demand immediate access to data without disruption and with more transparency. This digital transformation to virtual family offices will also allow for a leaner staff that can deploy resources more quickly.
The events of 2020 have led capital markets to affect businesses in different ways. Underwriting slowed for high-yield borrowers. Mergers were put on hold. Stock markets have been up and down, and a record number of securities and their values have been exchanged. As financial conditions improve, confidence combined with cheap credit will have companies seeking liquidity to get through the rest of the crisis. Corporations have been tapping into the public debt markets at high rates. While this generated profits at the start of the recession, bonds are less likely to be issued as businesses restore their reserves and establish liquidity that will be needed into the future.
For the rest of 2020 and into 2021, investment banking associated with M&A activity will continue to be tied to the economic recovery amid a softer deal pipeline. When the economy finally bounces back, there will be opportunity for a backlog of deals, boosting advisory revenues.
Data and Private Equity
In the time of COVID-19, certain private equity trends have emerged and are expected to be here to stay. People are still paramount, but how they work has changed. Data continues to be more important to deal making to determine the areas for greatest earnings impact. Datasets will track strategic movements and metrics within companies to gauge their performance. Remote workforces will allow competitive PE firms to source key financial talent from entirely new geographic regions. Firms are also expected to outsource more of their back-office work functions and instead focus on front-office responsibilities.
Ready to Sell?
If you are a business owner who is considering making a move, our M&A experts at Benchmark International would love to discuss how we can help with the sale, exit or growth of your company.READ MORE >>
The COVID-19 pandemic and the resulting government responses have had a significant impact on consumer spending, with retailers closed for months and shoppers staying home starting in the early part of 2020, with the timing of closures varying by country. Many consumers continue to stay home, even as most businesses have reopened. Online shopping has surged due to the pandemic. In the U.S. and Canada, e-commerce orders are up 146%.
Household consumption increased over the summer and is forecast to continue. Certain consumer behaviors that were newly formed during the earlier stages of the pandemic are expected to permanently influence spending habits. Retailers will need to clearly understand these behavioral shifts as they navigate the immediate future, and into the long term if they plan to succeed amid the new normal.
Digital as Key Driver
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As globalization becomes more common in our world, many businesses are choosing to take advantage of the growth opportunities that lie in expanding into new markets. But expansion can be a significant undertaking for small and middle-market businesses, with many moving parts. As a business owner, you need to fully assess and understand the risks and rewards that expansion can present for your company. The following steps outline areas on which you should focus, and which elements of your business you should have ready in order for an effective expansion into new markets.
Before expanding your company into new markets, you must have a comprehensive understanding of what the overall impact on your business will be. Conduct market segmentation and product gap analyses to assess whether your product or service will sell in the target market and do a SWOT analysis to see how it stacks up against local competitors. You need to know if there is a need for your company and if anyone will buy what you are selling. You will also need to consider how large the market is and how long it may take to reach your target sales numbers.READ MORE >>
Many factors can impact middle-market M&A deal making, but one of the most significant issues that can affect closing is a valuation gap between the seller and buyer. This tends to be more common during a seller’s market because business owners with successful companies are inclined to wait for the best offer, versus a buyer’s market that occurs when there are fewer buyers, which motivates sellers to jump at an offer. Unrealistic expectations about valuation multiples often stem from the comparison of a mega deal to a middle market deal—a situation under which the same multiples are typically not going to apply.
There is also often a disparity between what a seller needs to maintain their retirement lifestyle and what value can be extracted at the time of the sale. There may be differences between a buyer’s offer, what they pay, and what the seller ultimately receives, as taxes are always a factor in a transaction. Additionally, the timing of the deal and the perception of risk regarding future growth and earnings flow for the business can play a major role in the size of the valuation gap. Selling a business is a highly complex process and it comes with great emotional implications for a seller. Emotional ties coupled with overt optimism can easily cloud one’s vision when it comes to the actual value. As a business owner, you put in a great deal of work starting your company and building it into what it is today. In contrast, selling that business is completely unchartered territory for most owners. When you are looking to sell, you need to be realistic regarding the company’s current value and its growth rate, and what the buyer will be getting out of their investment. Buyers are not going to recognize the hard work you put into starting the business in the same light that you do. All that work you did in the beginning is not on their radar—they are going to be focused on their returns.
Valuation gaps also result when private equity firms and strategic buyers compete for quality investments and relatively inexpensive financing is available. This can be both good and bad for middle-market business owners. Significant buyer interest creates considerable competition for quality deals, which is great. But at the same time, if the market is hot and demand is high, unrealistic valuation expectations and skewed perspectives can result in a valuation gap.
This is why a thorough evaluation of a business is so crucial to the M&A process. A good M&A advisor will take meticulous steps to best determine an accurate current business enterprise value, while also managing the seller’s expectations of a valuation range before going to market. So, if you are a business owner, and you plan to approach buyers without professional M&A representation, you need to understand company valuation gaps, your intrinsic risks as a seller, and how to bridge these gaps. This can require a great deal of education on your part and can be very time consuming. Or you can simply enlist professional M&A advisory expertise and have the peace of mind that the fate or your business is in the best possible hands. The best advisors will work diligently on your behalf to help you attain your goals for your business and your financial future. It requires a team with proven experience, resources, and best practices to successfully navigate the many legal, accounting, due diligence, and marketing considerations involved in arriving at an accurate and realistic company valuation and getting a quality deal done.
Engage Our Expertise
Our top-notch M&A analysts at Benchmark International can help you with your company, from creating growth strategies to selling it for maximum value. Set up a time to talk with us and we can determine what solutions are best for you and your business.READ MORE >>
Business and professional services (BPS) firms are facing increased uncertainty amid the COVID-19 global pandemic. This climate is resulting in less investment and more reliance on revolving credit to maintain access to cash for operating expenses, and keeping priorities on payroll and workforce decisions. Companies with strong liquidity will shift to growth strategies and digital transformation. Also, with a greater need for mobility in a more remote-working world, there is a greater emphasis on cybersecurity, especially for government contractors and law firms.
Government Contracting: A Hot Market for Acquisitions
Government contracting is a significant moneymaker, especially in the United States. These firms rely on the needs of the government and the availability of financial resources for public investments. Government spending is often used to stimulate the economy during a slump. Through the first two quarters of 2020, government spending held steady, with health spending peaking along with the COVID-19 response, with billions going to national interest agencies and programs related to the pandemic.
The middle market in government contracting is comprised of several small, technically specialized service providers that offer high growth opportunities for larger companies that are seeking more capabilities and specific contract access. The pandemic slowed deal flow in the first half of 2020, but deals still happened with transactions expected to continue in the second half of the year. Private equity firms are seeking stable streams of cash flow and government contractors are relatively insulated from recession, making them a solid target for strategic investment and bolt-on acquisitions. M&A activity in the government contracting space is forecast to continue into 2021 as the sector (with the exception of aerospace) has been less impacted by the coronavirus and there is a need for more consolidation in the market.
Cybersecurity is paramount for government contractors for obvious national security reasons. In July of 2020, the U.S. Department of Defense issued the Cybersecurity Maturity Model Certification (CMMC) to build upon cybersecurity best practices from established industry standards with the goal of reducing cyber-risk among its contractors. Other departments of the government will likely do the same, prompting contractors to prepare for it in advance.
The big commercial tech companies typically draw the top tech and cybersecurity talent, making it challenging for government and its contractors to attract talent and offer competitive salaries. During times of increased unemployment due to a pandemic, many skilled workers are seeking out less risky positions. Government contractors should jump on this opportunity to attract young, tech savvy talent.
Law Firms: Challenges and Opportunities
Due to the pandemic, law firms have had to deal with furloughs, layoffs, pay cuts and reducing expenses while finding new ways to boost revenues while working remotely. Liquidity equals agility in uncertain times, so firms should seek to expand their credit lines while making the most of government assistance options.
Human capital remains the single biggest asset for law firms. Working remotely has brought about new challenges for attorneys and staff as they juggle the demands of working, parenting and caregiving. Investing in programs, technology, and other ways to support staff is more important than ever. Amid cutbacks and a lack of contact with colleagues, talent needs to know they are still valued and connected to the firm’s success. Firms also need to take this time to assess what lessons have been learned from remote working regarding obstacles, delays and infrastructure needs and how they can address needs, especially in regard to digital support.
Security and privacy are major issues for law firms operating remotely as they need their files and records to be accessible from outside the office. A digital security strategy is key even once the pandemic has passed, as no one knows for sure what the new normal will look like. Once security is implemented and established, focus can shift to maintaining client relationships and creating revenue growth into the future. Investment in mentoring programs and empowerment of staff can help grow the business and identify new opportunities to support the firm once the pandemic is over and the economy is ready to bounce back.
If you are thinking about a merger or acquisition for your business, please reach out to our M&A dream team at Benchmark International to discuss how we can help you accomplish great things.READ MORE >>
Next-generation 5G networks are widely viewed as one of the most impactful and anticipated technological developments in current times. With super-high speeds of 100 times faster than that of 4G networks, 5G is expected to bring broadband connectivity to 10 times the wireless devices and usher society into a digital industrial revolution that will open up new possibilities, innovative applications, reduced energy consumption, and economic growth.
The Impact of the 5G Value Chain on the Global Economy for 2020-2035
- Up to $13.2 trillion of goods and services through 2035
- $2.1 trillion in GDP growth
- 22.3 million new jobs
*According to a study commissioned by Qualcomm Technologies, Inc.
When Will 5G Finally Be Available?
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The industrials sector has had to adapt to significant disruption due to the global COVID-19 pandemic, and the challenges associated with it. While 2020 started on a very positive note with rapid growth for the global manufacturing sector, manufacturing output plummeted throughout the beginning of the year and into May due to shutdowns around the world. Output, new orders, exports, and purchases all fell to levels not seen since the 2008 recession. Many large manufacturing countries were under lockdowns into April, but restrictions were eased in May, which helped deter the overall rate of decline. In the wake of the crisis, many companies have found ways to evolve and use digital solutions to transform their business models, discovering changes that will continue to be beneficial in a post-COVID world. This adaptability is crucial to the survival and future relevance of these businesses.
- Automation and connective worker technologies have become even more important to boosting productivity.
- Migration to the cloud allows companies to be more flexible in dealing with disruptions.
- The auto manufacturing industry is growing more resilient due to greater supply chain visibility.
- For oil and gas companies, advanced digital technologies are a vital investment.
The Fourth Industrial Revolution
Industrial companies that made prior investments in digital technologies and IT infrastructure were able to operate efficiently during the earliest phases of the pandemic. The Fourth Industrial Revolution, also known as Industry 4.0, has enabled manufacturers to evolve their traditional supply chains and processes into highly interconnected systems. Leading organizations have been investing heavily in developed digital platforms specific to the industrials sector, pivoting business models towards being more software-centric. Additionally, smart manufacturing technologies are now transforming traditional manufacturing processes and paving the way into the future. More and more companies will be exploring digital technologies to enhance their flexibility and operate more innovatively. Robotics and 3D printing are among the most popular operational solutions that are expected to see continued heavy investment.
While remote work has become a relatively easy and normal option for many employees across different sectors, the industrial manufacturing sector is not one of them simply for logistics reasons. For example, machines need operators to keep them running. However, it has been demonstrated that technology can help limit the number of people needed to maintain operations.
Connected worker technologies are helping to streamline and hasten solutions. Typically, machine repairs require operators to contact service technicians, sometimes located in different facilities or at the original equipment manufacturer. Also, training new or existing workers has typically been face to face. Augmented reality is helping to eliminate in-person interaction for the purposed of repair, service and training and empowering workers to be more independent through digital on-demand access to manuals, instructions, and other resources.
While manufacturing companies tend to be more hesitant about migrating operations to the cloud, these organizations are realizing that cloud technologies enables them to move inventory, work smarter, customize products, and shift resources in much more flexible manner. The cloud is also an effective asset-performance tool that gives supervisors a remote window into facilities, production lines, and individuals.
Robotics and automation have significantly increased productivity for manufacturing processes. By replacing manual processes with automated alternatives, it helps to mitigate workforce availability challenges and reduces the impact of low-cost labor decisions.
Additive manufacturing and 3D printing continues to evolve and has shifted from the production of prototype applications to finished products. These manufacturing technologies are gaining more traction and offer efficient value chain solutions that enable on-demand production, less working capital, reduced supply chain complexity, fewer tools or parts needed, and less frequent human intervention.
The Auto Industry
Technology and connectivity is now the third most cited investment priority for the
automotive manufacturing industry. The future lies in edge computing, monitoring software, and the Industrial Internet of Things. Companies are able to collect and analyze data on site and in real time, connect applications to essential equipment, and conduct advanced monitoring and remote controls.
Another result of the pandemic for the auto industry is a need for more transparency in global supply chains. Thanks to AI, there is a shift from existing models in equipping automakers so that suppliers can use analytics to respond to changes in real time. For middle-market companies that have been known to underinvest in tech, this shift is especially important. Investment in IT infrastructure will help establish a more nimble and scalable environment, and will create more valuable data. The sequentially distributed databases of Blockchain technology are also changing supply chain management and adoption is expected to increase greatly into the future.
The Oil and Gas Sector
Digital technologies are also being adopted by oil and gas companies in order to bolster cost and operational efficiencies, improve safety, and reduce environmental impacts.
Robotics, AI, cloud solutions and Blockchain are all being used more and more to advance the industry. According to Bloomberg, oil companies are expected to spend $1.3 billion on advanced analytics alone in 2021. The big oil and field services companies with more experience aggressively adopting innovation and that are in favorable cash positions are more likely to continue investing in new tech. Human intervention is being scaled back. Maintenance procedures are being automated. Drones are being used to monitor real-time conditions and detect leaks. AI sensors are monitoring conditions such as temperature and vibration. At the same time, small and mid-size companies that were less mature coming into the pandemic are likely to focus spending on technology that helps them keep their businesses running.
No matter what sector your business operates within, Benchmark International is here to help. Contact us to discuss how we can help you grow or sell your business for maximum value.READ MORE >>
The real estate industry, both commercial and residential, is undergoing transformation due to the effects of the COVID-19 pandemic. People are working from home, traveling less, and some are migrating to smaller cities. Digitalization is becoming more prevalent, as owners, developers and managers of properties are seeking out virtual and touchless solutions to ensure safety and boost efficiency in a competitive market. Middle-market companies that keep up with the demand for innovation are poised to thrive under these new-normal conditions.
Real Estate Trends Expected to Continue
- Office spaces are being reconfigured to offer more space for each worker.
- Remote work is facilitating home purchases farther away from large cities that are home to corporate headquarters.
- Virtual touring experiences are becoming standard for home sales.
- Hotels are adapting to new measures to ensure guest safety.
- Retail properties are being used for other commercial uses.
- Leasing arrangements are becoming more creative to improve liquidity and cash flow.
- The inability to have in-person property experiences are hampering due diligence efforts.
- The construction sector will continue to employ virtual tools such as 3-D modeling and site management platforms.
Remote Working and the New Office
As millions of office workers have been working remotely to help avoid spreading the COVID-19 virus, employers were somewhat surprised to see that workers were more productive while working from home. Analyses show that average workdays increased in hours and big tech companies announced that remote working would continue into the long-term future. A result of this is that companies are:
- Looking to reduce the cost of office space.
- Providing more space per worker for any necessary in-person collaboration.
- Using video conferencing setups in small team rooms to bridge home and office work.
- Implementing thermal scanners, improved ventilation, UV light for cleaning and other safety measures.
Property owners and managers of office spaces have been able to continue to collect rent payments during the pandemic. However, as unemployment rises and the economy remains uncertain, it could impact the financial markets, making property and mortgage payments more difficult. Additionally, pension fund managers for large unions often invest in office markets due to their stable rents and cash flows, but if tenants cannot pay rent, pension payments may be cut.
Residential Real Estate
Residential home buying is also changing due to the coronavirus. Prior to the pandemic, Millennials were already willing to sacrifice job opportunities to buy homes in secondary cities in search of affordable housing. A study by Redfin showed that more than 50 percent of workers in major tech hub cities would move elsewhere if their company offered a remote work option, with the desire to live someplace less expensive. New tech advancements in a more remote-work-driven world are enabling these workers to pursue both dreams. Major tech companies are recognizing the cost burden that comes with maintaining sweeping campuses in major metro areas and are leading the way in the trend to shift to remote working as more professional services companies follow suit.
How homes are being purchased is also changing. Online home shopping by Millennials was already on the rise before the pandemic, causing realtors to adapt their selling processes. Virtual reality tours and 3D floor plans are becoming standard practice. Appraisers are using drones for exterior photography. Paperwork is reduced and replaced by electronic filing and signing.
Retail Real Estate
Retail property owners have many tenants that have been forced to close due to COVID-19 restrictions and many of these tenants are refusing or unable to pay rent while closed, forcing landlords to devise workarounds and, in turn, struggle to pay their own bills. Retailers were already struggling pre-pandemic due to increasing e-commerce popularity. Now landlords are providing rent abatement periods, rent waivers, flexible payments, and interest-free repayment in order to aid in their tenants' survival.
Hospitality Real Estate
The pandemic has limited non-essential travel, as business travelers are working from home and many leisure travelers are choosing to stay home for safety reasons. The hospitality sector has taken a massive hit under these circumstances amid changing restrictions and stay-at-home orders. As economic loss negatively impacts the hospitality industry, operational priorities are shifting from personal guest experiences to the safety of guests. Economy lodging is being less affected than larger, upscale hotels because essential construction workers are still traveling to job sites in smaller markets while large conferences are cancelled and professional group business travel is being limited. Investments in new technologies by hotel operators are also crucial to the hospitality real estate industry as extensive safety measures are needed. Typical in-person processes are being replaced by digital options. Common areas are being reassessed to offer social distancing. New cleaning and ventilation measures are being implemented. These changes are expected to aid in the economic recovery in this sector.
A new era of technology is playing a major role in the construction industry. Enhanced safety protocols are being implemented in existing commercial buildings. Construction companies are embracing new technologies in the development and management of new projects. Prefabrication and modular buildings, as well as virtual construction methods, are seeing accelerated growth amid the new circumstances due to the pandemic. A recent survey showed that construction executives foresee double-digit
increases in single-trade and multi-trade prefabrication assemblies, as well as permanent modular construction, over the next few years. These construction techniques offer better project schedule performance, lower construction costs, and improved construction quality.
No matter what sector your business operates within, our M&A experts at Benchmark International are eager to discuss your future with you, whether it’s selling your business, growing your company, or devising your exit or succession plan.
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As the COVID-19 pandemic continues to impact everyday life, the technology, media and telecom sectors are playing critical roles in keeping people connected, working, and entertained. As more people work remotely and home school, the services provided by tech and telecom companies remain in peak demand by families and businesses.
- Acquisitions are driving growth in the tech sector, and there is more investment in innovation and R&D.
- Collaborative tech is expected to see sustained growth.
- As tech companies embrace working-from-home, talent is being spread out more geographically.
- Telecommunications companies are being relied upon for connectivity more than ever during the pandemic, and the focus on 5G-network implementation is a major priority.
- Broadcast TV faces challenges amid declines in advertising and fewer live sports, but ad revenue is expected to increase as many major sports are returning to play. Digital streaming and retransmission fees could also offer new opportunities.
- As video gaming and e-sports have undergone dramatic growth spurts during the pandemic, acquisition activity is expected to increase.
The explosion of the tech bubble, popping of the telecom bubble, 9/11, the financial crisis, now this. One of the benefits of working on mergers and acquisitions through unfortunate times is that you gain a good perspective on what lies ahead after the crisis passes. More specifically, you learn how acquirers will react and this in turn teaches you how to minimize the damage during the crisis. Every crisis is different but with four or five now under the belts of our senior staff, Benchmark International has been able to identify the acquirer behaviors almost certain to appear after this – and the next, and every other – dip in the inevitable rise of the middle markets.
To be clear, the dip here is not one of buyer interest or even multiples being offered to this point. As we near the fourth quarter, we continue to close deals, sign letters of intent, and bring clients to market. Please see our earlier post “What is Covid-19 Doing To The M&A Markets Now?” which continues to accurately describe the conditions we are seeing. What we mean by “dip” is the likely drop in your company’s revenue and all the other financial metrics that influences - and to some degree controls.
It is no secret that acquirers’ primary tool for determining their interest in, and their valuation of, a business is its financial performance. Businesses with growing revenue, healthy margins, and consistent performance sell for the highest multiples.
The situation we now face likely threatens all three of these characteristics and if your business has otherwise had a stellar historical performance concerning these three metrics, you may be extremely concerned that its performance during this period of the global slowing will forever mark its luster and lower its sale price.
While it is true that recapturing lost growth (i.e., growth that is not occurring at the moment) is hard to do, this is distinct from the real issues here – preserving the high multiple your business deserves. Fortunately, our experience indicates that your deserved multiple is salvageable – if you know how to do it. Yes, getting those record-high multiples for businesses at the end of the company sale process will be more complicated for the next few years, just as it was in 2009- 2012, but with the right preparation now and process later, you should have no reason to believe your multiple will be subpar in the future just because of the current financial setbacks.
Here are some key things to do and remember:
As we reach the middle of Q3, a look back at the past several months in the healthcare sector indicates certain key trends for the industry and how it is expected to undergo transformation into the future.
Even during a pandemic, innovation and development continues. Pharmaceutical, biotech, healthcare IT and medical device companies are persevering with new and highly advanced mechanisms that will impact outcomes and patient experiences. From specialty drugs to artificial intelligence applications and from 3D printing to virtual reality, the healthcare and life sciences sector is expected to remain an attractive investment area into the future.
Under the demand for COVID-19 testing, contact tracing, and the race to find a vaccine, governments are shifting more of their budgets to healthcare services. Also, in vitro diagnostics testing (IVD) will continue to increase as major players such as CVS and Walgreens build it into their location infrastructures.
Healthcare IT companies have lofty aspirations for enterprise-grade artificial intelligence platforms that can predict pandemics, forecast patient volumes, authenticate reimbursement, and enhance drug management and self-care. Big data in healthcare also continues to draw interest and grow at a high CAGR.
Social distancing and COVID-19 has resulted in the deferral of elective and non-urgent medical procedures. According to a study by JP Morgan:
- 13% of respondents will be postponing elective procedures until there is a vaccine available.
- 15% will be waiting until a treatment is developed.
- 40% said they plan to wait until within a few months of the crisis subsiding.
The use of telehealth services continues to grow in popularity as patients prefer to avoid in-person visits due to pandemic concerns. Prior to the pandemic, telehealth saw slow growth due to a lack of state and federal reimbursement, physicians’ resistance to adopting the new technology, and patient unfamiliarity with virtual visits. COVID-19 and changes to reimbursement have resulted in a massive uptick in telehealth visits over the past several months, growing at a rate of 7.9 percent. Telehealth is also being used more frequently for virtual urgent care and ER visits, as well as for mental health.
The healthcare labor market has been impacted by the current recession and other factors. 1.4 million healthcare jobs were lost as of April but 380,000 jobs were added back in May. Hospitals lost an additional 26,000 jobs. Many clinicians not treating COVID-19 as well as administrative staff are working remotely for the first time in an industry that has typically resisted virtual work. A certain level of virtual work is expected to remain in place into the future.
Because of the global pandemic, many private equity firmshave a heightened focus on their own portfolio businesses. However, the majority are still open to looking at quality opportunities; in addition, strategic buyers such as health systems and hospitals are considering M&A plans in the medium term. Overall, deal volumes are expected to increase between now and H1 of 2021.
Ready to Make a Move?
The M&A experts at Benchmark International are eager to start the conversation about your future, whether it is growing your company, selling your company, maximizing its value, or planning your exit strategy. We are committed to getting you results that fulfill your ambitions and exceed your expectations.READ MORE >>
Every business is unique and grammar experts will tell you that you cannot place a modifier before the word “unique”. That said, selling government contracting business is a very unique art. Here are some insights from Benchmark International’s extensive experience with these engagements.
What makes selling a government contracting business unique?
Most importantly, there are far fewer financial buyers (e.g., private equity funds, family offices). This means the potential buyer population is both smaller and skewed toward strategic buyers, such as competitors, suppliers, and businesses in adjacent sectors. Therefore, the buyer outreach effort must be more robust, the marketing strategy, as with all writing, must focus on the proper intended audience, and each potential buyer that reaches out must be treated with extra care.
What keeps other buyers away from government contracting businesses?
The main issue is customer concentration. Many companies rely on one specific government or one specific agency for the vast majority of their revenue, for example, the Department of Defense or their state’s Department of Transportation. Knowing how to address this issue is not only key to attracting buyers on the edge of the process but also to stoking interest in all potential buyers in the process. “Customer concentration” is routinely cited in buyer surveys as the number one concern in the early stages of target selection. Thus, failing to address this issue head-on and intelligently can greatly reduce the buyer pool.
Do these businesses trade at a lower multiple than others?
No, there is no “government contractor discount.” These entities are viewed as “counter-cyclical” so when the economy is falling or expected to fall, they can demand a premium over their counterparts that only work with private sector clients.
The business itself may have characteristics – such as customer concentration – that can impact value, but the same is true of any business with any client base. And, to the contrary, the payment history of governments is far better than that of private sector companies and the reliability of these collections gives government contractors a boost on their multiples. This reliability premium moves inversely with the number of bankruptcy filings nationwide.
What type of government contractors get the highest multiples?
To a degree, the same factors that affect any business matter here – defendable intellectual property, long-term customer relationships, moats around the business, the strength of the management team that will stay on after the deal, the stickiness of the product or service offered, reputation, etc.
Additionally, the actual customer contracts draw an excessive amount of attention in these deals.
The longer the contract is the better. For service businesses, a dollar of revenue from a maintenance contract tends to yield more dollars in the sale than does an implementation or repair contract.
Some buyers place a higher value on fixed cost contracts, others on cost-plus or time and materials. Primes tend to get higher multiples than subs but not always, depending on the sub’s specialty. For smaller businesses that will likely have fewer open contracts, the length of time remaining on each contract and its rebid/extension terms are often points of high interest.
Lastly, whether or not the person who has relations with the government office is staying on or not is a big deal. If you are leaving and you have those relations, the sale process must be structured around this fact. This means customization of the type of buyers that are targeted and the story that is initially told to the market. Some buyers won’t mind so they would need to be the primary targets and those that will mind needing to be told at the right time and in the right manner.
What about preserving the set-aside nature of the business?
This is a question that all clients ask but few buyers care about it. We find that most clients don’t use their set aside status to win the majority of their work. More importantly, though, most government contracts do not require the prime to update the government in the event of a loss of status by one of their subs or even by the prime itself. The contracts tend to be “shoot and forget” in this regard. While it can affect some extensions or renewals, we often see that not being the case.
And buyers just don’t care. Today’s multiples are too high for buyers to win company sale processes just because they are looking for a set-aside business. If they aren’t paying for the brainpower, the relationships, the cash flow, or any other standard deriver of value, they aren’t making offers our clients will accept.
Is selling a government contracting business harder than selling a similar business serving the private sector?
Yes, for all the reasons above it’s a bit smaller of a needle to thread. But with the right process, a good deal team, patience, and a motivated attitude on the part of the owner, the process is entirely doable, and these businesses sell every day of the year.
What’s the market like at this minute?
As of the end of July 2020, the market has never been better. We are seeing multiples for all business types staying up at their pre-COVID record levels across the board. Also, we are seeing buyers that previously passed on government contractors reaching out specifically to see what government contracting companies are currently available.
To see a selection of our completed government contracting deals, please click here
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What’s the latest effect (as of late-July) COVID is having on lower middle-market M&A in the US?
Some deals have fallen out resulting in some new buyer requests emerging. As with stock in the publicly traded markets, we are seeing what you might call a “sector-rotation.” Any time you have a change in the macro-environment, whether favorable or unfavorable to the economy overall, you see buyer preferences shift.
Is activity shrinking?
Demand has moved and it takes time for supply to catch up. Also, it takes upwards of three months to close an M&A deal, even in the smoothest of times. So, replacing those deals that fell out that were in the middle or even their end phases will require some time. But the buyers still keep calling. We aren’t seeing a deeper trend, which would be concerning, about money being pulled out of private equity. So, the ship has taken a roll but there is no sign it's taking on any water.
Why haven’t buyers dried up?
Institutions and wealthy individuals invest in private equity and turn into the lower middle-markets because they need a place to set their money to work for them.
Globally, governments have slashed interest rates in response to the pandemic. That made every other class of investment less attractive. Coming into 2020, we were concerned that rising interest rates would make those other asset classes more attractive, and we would see the historic record inflows to private equity dry up. But that has now been deferred for another year or so. Once governments recognize the need to pay off these massive bills they’ve just created, probably at the end of the next budget and tax cycle, we will see interest rates rise, perhaps even faster than we had expected as governments raise taxes and attempt to inflate away their debt.
That’s fine for financial buyers but what about strategic buyers?
Yes, some have headed for the sidelines for the time being. But operating companies, as always, need to grow their revenue and the healthiest businesses will continue to look for growth opportunities. In the present scenario, we also have companies that weren’t as healthy or as growth-oriented that now need to replace some revenues and that need to, in a way, reinvent themselves or find alternate routes to market. We also are seeing trade buyers entering the market because they have lost key suppliers or are worried about losing key suppliers, and they are looking to integrate upstream. Fortunately, larger companies went into this situation with overall corporate debt at record lows. That means there are companies out there that have the room to borrow even if their operations are not going gangbusters at the moment.
But are banks lending?
Debt is tightening at the moment. Lenders don’t like uncertainty. This is part of the reason that deals that were negotiated pre-COVID are falling out. Buyers use as much debt as possible and if interest rates go up (which they did for M&A debt even though no-risk and low-risk interest rates were brought down), then the math of the deal gets reshuffled and someone backs out. But banks adapt and as the risk-free rate hovers near zero, they find ways to get comfortable with handing out M&A debt. Seeing senior debt on deals now brings them around 6% and mezzanine debt 12-14%, is helping them adapt faster at the moment. We are seeing deals carry a little less debt over the last few months, but bankable deals are still getting debt. Unfortunately, though, lenders are a little more investigative and slower than normal, so we are seeing this add perhaps a month to many deals.
What effect does this have on the price?
So far buyers are being creative, and those that are not are losing their deals. The good buyers are coming back and tinkering with the deal structure to keep the overall multiple up rather than lose the deal. We are seeing them ask for more seller debt and more rollover. Deals that used to have a 20% rollover component now might have 30 or 40%, leaving the sellers a bigger second bite at the apple while still satisfying their need or desire for a transaction.
So, is it still a good time to enter the market?
The best time to enter the market if you are selling ice is the summertime. But the amount of time it takes to get a company to market is longer than the range of our visibility at present into where the market will be when the company is truly at the step of “entering the market”. So that question carries a bit of a false pretext. The real question is: “Is it time to start the process?”
The answer to that question is: “It’s always time to be ready to sell.” And because of today’s added volatility, to the extent, an owner is trying to time a window they are going to have a better shot at it if they get started, get their marketing materials made, learn the process, and stand ready to enter.
Is it really all about market timing?
No. You can sell ice in the winter, and you can sell it for the same price as in the summer if you know what you’re doing. You just have to work harder and maybe be a bit more patient, creative, or flexible. You need a solid process, broad market outreach, and a good M&A team around you. I’ve known too many owners that waited for the right wave and by the time they realized it had come, it was past. At least those that were sitting on their board out in the surf could try to chase that wave or ride the back of it, as opposed to those waiting on the beach. You can certainly sit out a solid tough spell but getting the right deal is not about hitting the market at just the right time. Buyers come and buyers go. There is always a quality buyer out there that needs the business and will pay top dollar if handled properly.
Final thoughts on the current situation?
Selling a business is too important of a decision to let any single factor decide for you. The business is usually the owner’s life’s work and therefore the considerations are infinite. Never will all of them fall into a perfect line. In other words, there are always reasons to not sell. Fortunately, starting the process and deciding to sell is not the same thing. Starting the process simply requires the reasons to sell being slightly greater than the reasons not to sell. Then, six months or a year later when the contract is on the table and the pen is in your hand, the relative importance of the pros and cons shifts. Our clients pass up offers all the time. Just because they pass on an offer does not mean that they should not have started or entered the market when they did. As long as they retain absolute discretion to sell or not to sell throughout the process, being worried about where the market is or where it might be going should not be a major concern.READ MORE >>