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What Are M&A Sources of Capital?

When raising money to fund mergers and acquisitions, there are several ways that capital can be sourced. First, the financing needs to be raised with consideration of the company's operating cash flows. For example, if the business uses debt financing, it should have sufficient funds to cover the interest and repay the debt.

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What Are The Pros And Cons Of An IPO?

An IPO is an initial public offering (IPO), which is the first limited public stock sale by a private company. IPOs are a strategy often used by smaller businesses to raise capital from public investors in order to facilitate expansion and growth. Once public, the company can be traded on the open market. There are both upsides and downsides to taking a company public. 

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Top Reasons Business Owners Seek An M&A Strategy

What is an M&A Strategy?
A strategy for a merger or acquisition is the rationale behind the transaction. Your objective should determine the type of deal that is right for your company. Maybe there is even more than one objective. Commonly, these goals are focused on boosting financial performance and mitigating risk.

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The M&A Process From A Buyer’s Perspective

When it comes to mergers and acquisitions, it is common for a seller to struggle to see the transaction from a buyer’s point of view. This is quite understandable because a business owner spends years, and even decades, building their company into a successful venture. It makes it more difficult to see the transaction from a potential buyer’s perspective. Many M&A transactions fall through because the seller and buyer simply cannot get on the same page. As a seller, you can work with an experienced M&A advisor to help you manage your expectations for the value of your company so that you can not only get the most out of your deal but also make sure the deal goes through. If you’re selling a business, you should understand how the valuation of a company works, what it is based on, and what is important to a buyer.

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What Is A Sustainable Growth Rate?

As a business owner, it is important to have a solid understanding of what a sustainable growth rate (SGR) is, and why it matters to the valuation of your company. 

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How Can M&A Help My Business Recover From Covid?

The COVID-19 pandemic taught us quite a few lessons for keeping a business surviving and thriving in unchartered territories. Now is the time to be forward-thinking. There are ways that you, as a business owner, can utilize mergers and acquisitions (M&A) as an effective strategy to accelerate your company’s recovery from the lingering impacts of the pandemic from both a defensive and offensive perspective.

OFFENSE:


Accelerate Your Business Model

Inorganic Growth
Emerging from a pandemic is not the time for organic growth strategies for most businesses. This is especially true for sectors that have experienced irreparable impacts, such as retail, hospitality, tourism, and live entertainment. However, M&A can accelerate growth within a business model is otherwise not feasible or accessible ways. Whether it’s accessing new supply chains or acquiring a competitor’s talent, M&A is an effective tool that can open up several possibilities for growth and success.

Disruptive M&A
Technology and innovation have become more imperative than ever because of the need for rapid digitalization during the pandemic. When remote working and online conferencing became the norm, disruptive tech was put on an epic fast track. Everyone wants what is hot, and they want it ASAP. Otherwise, they risk falling behind the competition. As a result, these technologies offer significant M&A opportunities for companies in many sectors, such as cloud computing and artificial intelligence.

Boosting Supply Chains
Supply chains have taken a significant hit due to the pandemic, with some sectors experiencing worse disruptions than others (such as automotive, energy, and manufacturing). As a result, these sectors are being forced to reboot and find ways to alter their supply chains to get what they need. This is where M&A can be a real game-changer, helping companies gain access to alternative supply chains and keeping operations on track.

Alliances and Joint Ventures
Because of the pandemic, consumer behaviors and spending patterns have changed. Welcome to the new normal. This means that businesses will need to look to new strategic alliances to be more agile in catering to new customer habits, and M&A can help make these joint ventures a reality.

DEFENSE:


Protect Your Future

Integration and Value Creation
Now more than ever, many companies need to cut costs, free up working capital, and do it quickly. M&A is one of the more timely ways to make this happen. Also, planning on ways to create value today can protect your business in the future. By turning to M&A, you can both integrate and develop.

Divestitures and Separations
As economic pressures persist, many businesses need to divest non-essential assets. At the same time, they may also need to unload any highly sought-after assets for financial reasons. There are also opportunities due to sustainable investing becoming much more popular. In addition, environmental, social, and governance (ESG) initiatives lead to rebalancing portfolios, which could mean actionable assets for divestiture. In any case, sellers should enlist professional M&A advisement to ensure that they avoid getting into asset fire sales. Learn more about the value of hiring an M&A advisor here.

End-to-End Distressed M&A
2021 was a record year for M&A, and a great deal of opportunity still exists. Many types of investors, including private equity, activist, and corporate investors, have strong balance sheets. They are sitting on plenty of cash and are in the position to move quickly on acquisitions of distressed businesses.

Let’s Get Started
If you think M&A strategies could benefit your company, our experts at Benchmark International would love to hear from you so that we can discuss your options and help you make the most of your success.

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Eight Truths about The Current Market for Selling Your Business

For more than ten years, business owners have enjoyed a sellers’ market in the lower and middle markets. But the tide is turning. Here’s the headline: Multiples are not trending downward, buyers are slower, more cautious, and cockier, and deals are taking longer. 

 

The best analogy is that we have been on a roller coaster, and we no longer hear the clicking sound as we go up, but we’ve also not started to feel anything in our stomachs. It’s almost as if we are paused, and we feel certain that we know what is coming next. Buyers feel as if they’ve been bullied for the last decade by aspirational sellers and their agents. They have pent-up resentment. Some of it is starting to show. 

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What Is The Difference Between An M&A Advisor And A Business Broker?

When you are about to sell a business, you have a few options regarding how to do it, and whose expertise to enlist. Many people confuse M&A advisors with business brokers. While there are some similarities, they are not one and the same. There is actually more than one significant difference between an M&A advisor and a business broker. It is important for any business owner to understand these differences, so that it can be determined which is the best way to go about the sale of a company.

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M&A Trends In The Lower And Middle Markets

In the first quarter of 2022, global middle-market M&A activity maintained the momentum that we saw in 2021. Last year, lower and middle-market companies played major roles in deal-making activity. Companies of all sizes enjoyed significant buyer interest in sectors ranging from tech, transportation, healthcare, manufacturing, and logistics.

 A notable imbalance in supply and demand in the lower and middle markets has been driving up the valuations of healthy companies in hot sectors. This trend is expected to continue through 2022 for strong companies in the lower and middle markets, especially in sectors such as healthcare, cybersecurity, cloud computing, artificial intelligence, and niche manufacturing.

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Seller Handover In A Business Sale

Handover Process

After completing the sale of your business, there is typically a handover process between the seller and the buyer. One of a buyer’s most significant concerns when taking over a business is that the company’s performance continues as it was before the sale. When a seller is willing to stay on for a handover process post-closing, the buyer has increased trust in the business, resulting in the business selling more quickly and at a higher valuation. Therefore, it will be beneficial to both parties to plan this part of the process well and in advance of the time that the handover will take place. The length, compensation, etc., of the Handover period will be worked through during the Purchase Agreement negotiations. If there is a failure to recognize and offer an acceptable handover period for the business, it could cause a deal to fall apart while it is in due diligence.

Ready to explore your exit and growth options?

Stages Of A Business Handover

The typical stages of a business handover are the Training Stage, Handover Stage, and Assistance Stage. Immediately following the sale, the seller will usually continue to run 100% of the business. During this time, the new owner will take some time to familiarize themselves with the business. Then, as the Training stage begins, the seller will slowly reduce their involvement while the buyer continues to increase theirs. In the Training stage, the seller must create a checklist of items that he can run through with the new owner. Mark each item as complete once it’s finished, and keep this for your records if you run into any issues down the road. It is a good idea to observe how a day in the life of your business typically goes. Take note of every payroll task you complete, every person you communicate with, any supplier or contractor documentation, provide copies of all budgets, information about cash flow, etc. Continue with this process until you feel that you have been able to document all of the particulars that the new owner will need to know in order to keep the business operating smoothly. As the seller trains the new owner, the seller will slowly start to reduce their involvement while the buyer continues to increase theirs. This sequence will continue until the complete handover is achieved.

During the Handover stage, the new owner runs 75%-100% of the business with the seller still on hand to help answer questions and ensure that processes are running smoothly. If you have had a successful Training stage, the new owner will have increased confidence in successfully running the business. This may matter to the seller as well, particularly if there are any deferred payments or earnouts that have been agreed to in the structure of the sale. It is imperative to train the buyer and put them in a position to be successful, as both parties benefit from doing so. The new owner will now be in charge of making crucial decisions and bringing innovative ideas and future plans for the business to the table. Customer and employee relationships with the new owner should be solidly in place at this point, and the seller should have very limited involvement in the day-to-day activities of the business.

Once the new owner is running 100% of the business, it is common to enter the Assistance stage, where both parties have made an agreement to remain in contact for a set period of time in case there are any questions that come up. While the seller is no longer directly engaged with the daily runnings of the company, it is best for them to make themselves available to answer any questions that the new owner might have. Many times the majority of this communication can be handled through email and phone conversations. An essential item to have established for this stage is the amount of time the new owner can expect to receive help from the seller, paying particular care to have the expectations and limitations outlined.

A properly planned Handover period can help the seller and the new owner is mentally prepared for the seller’s exit and help prepare the business, customers, and employees for the handover. Once the handover is complete and the seller exits fully, they can know that the business is in good hands. It is time for them to recover from and reflect on the ownership handover period and identify their next goal to get excited about.

 

  Author
  Amy Alonso
  Transaction Director
  Benchmark International

  T: 512 861 3301
  E: Alonso@benchmarkintl.com 

 

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What Is A 338(H)(10) Election And Why It Is Important To Me?

Knowing the structure of a transaction you are involved in is key to optimizing the composition of a deal. If you enter a proposed transaction thinking you understand the offer, you may be blindsided by various structures that may affect your net cash position. A critical aspect of a transaction is understanding the structure and what it means for you as a buyer or seller. Clients often believe that they agree to accept a stock transaction only to find out that the transaction will include an election that may affect their tax bill. A 338(H)(10) election is one of the more popular tax elections, but there are others.

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2022 Food & Beverage Industry Report

The global food & beverage services market is forecast to grow from $3,232.94 billion in 2021 to $3,678.61 billion in 2022. That represents a compound annual growth rate (CAGR) of 13.8%. Growth is primarily due to companies rearranging operations amid recovery from the COVID-19 pandemic that resulted in so many challenges for the industry. By 2026, the market is expected to surge to $5,235.52 billion at a CAGR of 9.2%.

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2022 Fintech Industry Report

The global fintech market was valued at $6.5 trillion in 2021 and is estimated to grow at a compound annual growth rate (CAGR) of 13.9% between 2022 and 2028 to reach $16.65 trillion.

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Applying EBITDA Multiples To Your Company Valuation

If you are considering selling your business, you undoubtedly need to understand its value. Unfortunately, arriving at that answer can entail many different methodologies, and it often involves the familiar valuation formula of applying a multiple of Earnings Before Interest, Tax, Depreciation, and Amortization (EBTIDA).

For example, if a company boasts EBITDA of $1 million, and a five times EBITDA multiple is applied, the company’s estimated value is $5 million. But how do we know what multiple applies to your business? And how do we know if the EBITDA number is even accurate? After all, EBITDA will not be the same for every business.

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2022 Digital Healthcare Industry Report

The global overall healthcare industry value is projected to reach $665.37 billion by 2028. Focusing on the global digital healthcare segment of the market, it was valued at $145.57 billion in 2021, and it is expected to reach $430.52 billion by 2028, growing at a compound annual growth rate (CAGR) of 16.9%.
 
The COVID-19 pandemic led to significant shifts in the healthcare sector, as there was an urgent need to adapt and embrace new ways of operating. Many of these changes ushered in the latest in digital healthcare technology and are here to stay. The digital health segment applies software, hardware, and other tech services to the healthcare sector. The space is comprised of categories such as: 
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You Haven’t Missed Out On The Ideal Seller’s Market

2021 was a strong market for business owners looking to sell their companies. The market remains ideal and will do so as we move into the first quarter of 2022. As we are in the middle of this year, there is no better time to consider putting your business on the market.

2021 Recap
M&A activity was moving at a record pace in 2021, thanks to economic recovery, a strong stock market, low-interest rates, rapid digitalization, more SPACs, confident boardrooms, and available debt. The U.S. had reported more than $2 trillion in M&A activity in 2021, with the year on pace to be the most active in history. Not to mention that the second quarter of 2021 was the third straight, with total global M&A value surpassing $1 trillion. That is the first time this has ever happened in three consecutive quarters. So even in the middle of the year, when things typically slow down, we are still seeing a great deal of investment, and the market is still flooded with capital.

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2022 Marketing Consulting, Branding & PR Industry Report

The Global Marketing Consulting Market

The global marketing consulting market is expected to grow by $3.83 billion between 2022 and 2026, increasing at a compound annual growth rate (CAGR) of 4.75%.

Market growth is being driven by various factors, including continued education, the rising need for improved customer digital experiences, and the providing of custom-made solutions.

Because the global marketing consulting market is rather fragmented, we are seeing vendors trying to remain competitive by deploying growth strategies such as forming strategic partnerships. Over the next four years, 35% of the global market’s growth will originate from North America. 

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2022 Professional Services & Management Consulting Industry Report

The Professional Services Market
In 2022, the global professional services market is forecast to grow to $6697.56 billion, up from $6040.91 billion in 2021. That is at a compound annual growth rate (CAGR) of 10.9%. This growth is mainly due to companies’ urgent need to reorganize operations while recovering from the effects of the COVID-19 pandemic, which led to operational challenges because of lockdowns and restrictions. As a result, the global professional services market is forecast to grow at a CAGR of 9.6% to reach $9651.77 billion in 2026. 
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Benchmark International's Kendall Stafford Wins "Top USA Woman Deal Maker Award"

Benchmark International’s own Kendall Stafford has won the Top USA Woman Deal Maker Award from the 4th Annual USA Growth Intelligence Forum and the USA M&A Atlas Awards.

The award singularly honors the A-list of the most talented, respected, and brilliant women dealmakers from private equity, venture capital, investment banks, legal, and restructuring transactional communities. It is officially “award winner recognition,” unlike industry lists, rankings, editorial praise, or write-ups.

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2022 Real Estate Industry Report

The COVID-19 pandemic impacted nearly every industry in some way, but real estate underwent its own very unique transformation. Many office buildings have sat empty and seem almost obsolete while most workplaces shifted to work-from-home models, and many plan to stay that way or create hybrid workforce plans. Throw in the global supply chain issues, labor shortages, and inflation, and there are certainly economic risks for the sector. But the economy has steadily been recovering while the most serious times of the pandemic appear to be subsiding. 
 
GDP in the United States has fully bounced back from the 2020 pandemic-induced recession. This is good news for the real estate sector’s recovery. Coupled with low interest rates, strong economic growth will be very encouraging for commercial real estate. GDP is expected to grow by a strong 4.6% in 2022. 
 
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Questions to Ask Before Selling Your Company

What’s Your Competitive Advantage on the Market?

Consider why prospective buyers would be interested in purchasing your company. You should be able to identify its assets in order to get a proper business valuation. How unique is your product or service offering? Do you outperform the competitors in your sector or in a particular geographic area? You will also want to consider whether your revenues are stable, growing, or declining. If you understand why someone would be interested in purchasing your company, you will be more equipped to enhance those qualities and effectively articulate them to buyers.

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What is The Outlook For Capital Markets in 2022?

Capital markets drive capital to areas of innovation and positive growth, creating jobs and fueling economies. In the US, capital markets fund 73% of all economic activity. This takes the form of equity and debt financing of non-financial companies. Capital markets facilitate debt issuance, which tends to be a less restrictive form of borrowing for businesses. The usage of debt capital is the most prevalent in the US (80%), versus other regions (only 20–30%) where bank lending is more prevalent. 

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Mortgage Brokerage Industry Report

The Global Market

The onset of the COVID-19 pandemic rattled the worldwide mortgage market. New lending volumes plummeted to record lows amid declining consumer sentiment, job losses, and nationwide lockdowns in many countries. However, new mortgage lending has remained on an upward trajectory since the second half of 2020. The total number of closed-end mortgage originations jumped from 8.3 million in 2019 to 13.6 million in 2020. That’s an increase of 65.2%. Regulators have kept interest rates at an all-time low. Even though interest rates could begin to tick up at some point, globally, the mortgage brokerage services market is expected to continue to see tremendous growth through the year 2027.

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Financial Services Industry Report

Financial Planning & Advisory Sector

In 2022, the market size of the financial planning & advisory industry is $59.2 billion. It is expected to increase 4% this year. Between 2017 and 2022, the market has grown 4.5% per year on average. The size of the market has increased faster in the U.S. than the overall economy. 

Industry profit declined in 2020 due to declining assets under management and lower return on assets but increased in 2021 as the economy began to recover. As macroeconomic conditions continue to improve through 2026 gradually, industry operators are expected to benefit from rising equity values and rising interest rates. 

High competition is a challenge in the industry, while the population's median age represents an opportunity. This is because the rising median age of the U.S. population is approaching retirement age, which increases the demand for retirement planning, capital preservation, and estate planning.

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The Increasing Adoption Of Enterprise Resource Planning And Customer Relationship Management Software

Due to the COVID-19 pandemic, there has been increased adoption of enterprise resource planning (ERP), customer relationship management (CRM), and other entrepreneurial software. In 2020, many companies accelerated their plans to begin using these systems, and the market for them remains hot, particularly for Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) models. COVID forced most businesses to digitize their offerings in real-time as consumers began turning to online shopping and employees started working remotely—both trends that are expected to continue into the future.

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The Shift From a Seller's Market To a Buyer's Market When Interest Rates Rise

So if you are a business owner considering selling your company, the good news is that right now, it's a seller's M&A market. By October of 2021, total M&A deal activity reached $4.4 trillion, which is an increase of 92% compared to a year ago and is the strongest opening period for M&A since 1980. In addition, merger activity resulted in deals totaling $1.52 trillion in the three months prior to September 27, 2021. That's up 38% from the same quarter in 2020—and more than any other quarter on record.

In a seller's market, demand is high for assets that are in limited supply, giving sellers more pricing and negotiating power. This demand can be attributed to a recovering economy, high cash balances, big government spending, new SPAC buyers, and low-interest rates. Plus, investors are flush with cash and ready to spend it on acquisitions that can help create growth or add capabilities. When market conditions shift, buyers have the upper hand in deal negotiations. And this could happen when the U.S. Federal Reserve increases interest rates in the next year or so.

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What Does Inflation Mean For Your Ability to Sell Your Business?

Short answer – We don’t know. The M&A market has never interacted with this much inflation before. Inflation is now at a 40-year high. In 1982, there was no M&A market. The birth of the market is most often traced to KKR’s 1988 takeover of RJR Nabisco, as made famous in the 1989 book “Barbarians at the Gate” and the 1993 movie of the same name. Whether that is the actual date of birth or not can be argued. Still, at the time it was commonly thought that the cash for the $25 billion price tag was unattainable because, as the book says, there was a belief that there was not anywhere near that much excess cash floating around for doing deals in the entire world.

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The Impact of Labor Shortages on M&A

The Labor Shortage Persists

The COVID-19 pandemic has impacted companies of all sizes, but small businesses have certainly been hit the hardest. First, there were total shutdowns, followed by financing problems due to slowed business, and now it is labor shortages that are the latest issue as the world works towards recovery. 

The slew of workers leaving the workforce altogether is fueling a growing labor shortage in what seems to be every industry. Demand is up, and supply is down. Businesses are facing concerns with not having enough people to get the job done—especially in sectors such as healthcare and technology. These spaces are seeing attrition rates of 3.6% and 4.5% higher, respectively, than last year. Research even shows that 36% of workers who quit their jobs did so without another job lined up.

And the labor shortage is an issue that is happening on a global scale, from the US to Canada to Europe. According to the US Census Bureau, many businesses struggle to retain and attract employees, and 49% of business owners say the labor shortage is affecting their business. And a Canadian study reported that 30% of Canadian business owners say the top motivating factor for pursuing an acquisition is gaining access to new talent. That number is up from 20% before the pandemic. Additionally, a recent Eurostat survey found that, in the third quarter of 2021, a worker shortage was hampering production at 83% of industrial companies in Hungary, 50% in Poland, and 44% in the Czech Republic.

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No Recession in 2022, But 2023 May Be a Different Story

The good news is that experts agree that 2022 will be in the clear from a recession for the US economy. But the next few years may tell a different story. 

An economic downturn could arrive as early as 2023. Federal Reserve policy is expected to change, which will result in more business cycles that many companies will not be ready to face. Even if the country is lucky enough to dodge a recession in 2023, we can expect the economic decline to be more detrimental in 2024 or 2025. The Fed will eventually start easing up on stimulus initiatives and raising interest rates at the same time that inflation is on the rise. It usually takes the economy about a year to react to the Fed’s actions, putting us on track for a safe 2022, but with the following years feeling the impacts.

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2022 Is a Seller's Year for M&A

2021 Was a Record Year

In 2021, dealmakers worldwide announced $5.6 trillion in M&A transactions (that’s 30% higher than the previous record), and the U.S. reported $2.9 trillion in transactions (that’s 40% higher than the previous record). While 2021 may have been a record-breaking year for middle-market M&A activity, 2022 should be an excellent year for sellers. 

Last year several factors drove deal activity to new heights:

  • Pent-up activity from the previous slow year because of the COVID-19 pandemic
  • A wealth of capital seeking investment opportunities
  • Potential tax changes this year
  • Strong economic growth
  • Continued low-interest rates
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2022 Oil & Gas Report

In dollar value alone, the oil & gas sector is the world’s largest industry, employing a massive workforce of around 4 million people globally. The major oil companies account for a significant percentage of a country’s national GDP. The world’s largest producers of oil are the U.S., Saudi Arabia, and Russia.

In 2021, the oil & gas sector recovered well, with oil prices climbing to their highest levels in six years. Total revenues for the oil & gas drilling sector in 2021 came to approximately $2.1 trillion. The global oil & gas market is forecast to reach $7425.02 billion in 2025. That’s a compound annual growth rate (CAGR) of 6%. This growth is primarily due to companies shifting their operations during recovery from the effects of the COVID-19 pandemic. Low-interest rates positively impacted the oil & gas industry in most developed countries. 

The global oil & gas exploration and production sector account for a large chunk of the global economy. The growth of this sector is expected to increase in the future, with OPEC crude oil production averaging 34.15 million b/d in 2022.

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2021 Was a Record Year For M&A - And 2022 Could be, Too

After the trials and tribulations of 2020, no one really knew what to expect going into 2021. Yet, for the world of M&A, it couldn’t have been a more pleasant surprise.

Last year has most certainly been a record year for M&A deals, making a huge comeback from 2020. In 2021, the number of announced deals exceeded 62,000 globally. That’s up an unprecedented 24% from 2020. Deal values reached an all-time high of $5.1 trillion.

Almost all sectors are showing signs of recovery from 2020. Values are up and multiples are rising, with strategic M&A multiples at an all-time high (a median multiple of 16x EV/EBITDA).

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Benchmark International Awarded M&A Deal of The Year (100M - 250M)

At the 20th Annual M&A Advisor Awards, Benchmark International was awarded M&A Deal of the Year (100M-250M) for the acquisition of PBK Architects by DC Capital Partners.

As the 23rd largest US-based architecture firm, PBK, based in Houston, Texas, and its subsidiaries in California, Beijing, Shenzhen, and Hong Kong, employ more than 500 architects, engineers, and related professionals.

In addition to its Top 25 status, in 2019, PBK was ranked as the “#1 Education Design Firm” by Engineering News-Record (“ENR”), widely regarded as the engineering and design industry’s premier publication. Specializing in K-12 projects and, in particular, large public high schools, PBK has long been the go-to firm for sustainable design and next-gen integrations in particular. The company also focuses on two related building types—higher education and sports facilities.

This transaction followed closely on the heels of 11 other deals that Benchmark International closed in the architecture, engineering & construction (AEC) space in the first half of 2020.

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Benchmark International Named Among The 50 Best Workplaces Of The Year

Benchmark International has been named as one of the 50 Best Workplaces of the Year 2021 by The Silicon Review. The list is handpicked from different areas and recognizes businesses that attract both talent and clientele and stand out with regards to unique and positive company culture.  

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HVAC: A Consolidating Market

When financial buyers think of HVAC contractors, they see an industry ripe for consolidation. The trend of HVAC consolidation started a few years ago and has not slowed down.

Throughout the United States, there are thousands of independent HVAC contractors. Financial buyers, such as private equity, see the opportunity to consolidate the independent firms to create a regional or national presence. The market is roughly a $20 billion industry that is fairly recession proof, especially throughout warmer states, such as Texas and Florida.

Private equity seeks opportunities to expand businesses through acquisition and organic growth. Once they have a foothold in the industry, they can add related services, such as plumbing services, to the roll-up strategy.

HVAC consolidations tend to be in high demand in markets that have a need for the services. Some focus on new construction, while others focus on servicing existing units that can be viewed as a recurring revenue model. The competition in the local market is key when an acquirer is looking at an acquisition. Is the HVAC target company a big fish in a small pond, or vice versa? What is the growth potential within the market? Cities and towns that are growing tend to be more attractive.

 

Ready to explore your exit and growth options?

 

Additionally, HVAC contractors might specialize in commercial or residential services. Depending on the roll-up strategy, the acquirers might have different goals on what they are looking for in the consolidation.

The consolidation allows for a larger firm to take advantage of perks that a smaller firm might not have access to due to size or cost prohibition. For example, the roll-up might be able to build out software and accounting systems to help increase the efficiencies of the company or recruit top executives to add a level of professionalism to the company.

Having this type of option within the market allows for the seller to have options about their company’s next phase. Having a larger, growing firm complete the acquisition allows the seller and the company’s employees opportunities that the selling firm could not achieve on its own. The seller may stay on post-closing in a different capacity or retire and allow employees to step into the management role. In any case, mergers and acquisitions can be an ideal solution for companies in the HVAC sector.

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Why Lower Middle-Market Companies are Attractive to Buyers

The lower middle market encompasses some of the most diverse selection of companies available to buyers, from “Mom & Pop” service shops to highly innovative technology firms paving the way for disruptive change at the highest levels. For this reason, lower middle-market companies have been the backbone of the U.S. economy from the very beginning—and remain so to this day. The value that these companies bring does not go unnoticed by the broader market, making this segment a high-activity space for engaged buyers and sellers. And motivated buyers are adept at spotting value, providing opportunities for well-informed sellers to maximize value on their exit.

Many companies at this end of the market operate in highly fragmented industries. From HVAC equipment providers and servicers to pool maintenance and other small businesses, you can see this fragmentation simply by driving around any local geography. When an industry is highly fragmented—and also highly profitable—it creates a “sweet spot” for both strategic and financial buyers. Private equity strategies, for example, will often follow a formula of buying a larger “platform company” then searching the lower middle market for smaller “bolt-on” acquisitions to grow the company from there. The strategy is often referred to as a “roll-up.” If done correctly, it can bring large returns for both the acquired company and the buyer. Strategic buyers (firms already operating in the same industry as the acquisition target) often regard M&A in this end of the market as a better way to grow market share versus slow and costly organic expansion.

 

Ready to explore your exit and growth options?

 

Business owners and managers in the lower middle market are often looking to exit for retirement purposes. This reality can be advantageous for both buyers and sellers. Oftentimes, there is no succession plan in place heading into the retirement/exit decision and process. Many small businesses do not have a large chain of top executives that make a transition easy, and handing the business over to their children is often not a realistic option either. In other circumstances, the notion of selling the business comes up suddenly as a response to situations like health problems or other personal “black swan” events. In all circumstances, the right buyer—be they financial (private equity) or strategic—presents lucrative solutions that provide for the off-ramp and transition that ownership is seeking.

As such, there has been a large increase in demand for companies at this end of the market, as well as a corresponding awakening of ownership to recognize and test the benefits of a sale process. Investors are sitting on an ever-growing pool of capital that they are looking to deploy, seeking returns they cannot get elsewhere. The lower middle market allows investors of all stripes to purchase assets with relatively low debt (and, therefore, risk) compared to much larger companies. Additionally, the COVID-19 pandemic impact cannot be ignored when selling your business. COVID has hurt and even crippled a lot of businesses at the smaller end of the market. It also put an elongated pause in the mergers and acquisitions process. These two factors have led to pumped-up demand and lower supply, driving to significant increases in activity and deal volumes as the economy begins to pick up again.

When the time comes, business owners need to be ready to act quickly on sale opportunities. There are a lot of factors that go into selling your business. There will be different types of individuals and entities that come through to inquire about the potential acquisition of your company. While it might be tempting to jump at the first offer that comes, it is better to get a sound understanding of the wider market, and where the highest synergies/motivations (and therefore, the best valuations) can be found. There are always more opportunities to transact than one might think, and there are potential buyers out there for any type of company. The process of finding the right buyer always takes some “travel time”—with some speed bumps along the way—but a sound process that is run correctly can bring windfalls that will certainly justify the effort.

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The Myth of the “M&A Cycle”: Implications for the Middle Market

People like to sound smart on the golf course. It’s one way to distract others from your golf game. Since finance and investing are popular subjects of discourse out on the links, there is always opportunity for high-minded musings on business topics. One evergreen theme revolves around the “M&A cycle.” More specifically: “Where are we in the “M&A cycle?” Is it heading up or down? Is the “M&A cycle” about to end?”

The first question above is an important one, which we will address. The second two—both very common—do not seem to grasp the nature of a “cycle,” or even what a circle looks like. In any case, what precisely makes the topic so endlessly fascinating and useful for the golf course is its totally subjective and nearly nonsensical nature as a framing concept for making buy/sell decisions. If our financial reality were truly an endless loop with defined and unchanging points to exploit around that loop, the cadence of our lives as entrepreneurs, investors, and advisors would certainly look a lot different. We would simply place our bets at certain points at the beginning of each year, later picking them up at different equally obvious points. What a world that would be!

The bad news is that there is no such reliable cycle to lean against. But there is good news for business owners considering an exit or seeking financial partnership:

  1. There are always opportunities in any market to maximize deal value.
  2. Companies and sectors can benefit from opportunities during any market conditions.
  3. The time is, therefore, never simply “right” or “wrong” to bring your company to market.

Let’s look at some of the most common platitudes around the “M&A cycle.”

Platitude #1: An Economic Downturn Will Drive Deal Volumes Down

This might be true on a net basis at the most macro level, but if you’re a business owner or manager contemplating a partnership or exit, that macro perspective is borderline meaningless to you. First, let’s counter this argument with another handy platitude: “There’s always a bull market somewhere.” The key to playing any macro market—whether it is up or down—is to understand where the fast streams lie within that context. No individual business trades as a proxy to the entire market, and during any downturn; for example, there are bullish sectors that offer sellers opportunities to engage buyers at a potential premium.

On its face, while declining deal volumes sound like a negative reality, such circumstances often provide successful companies with higher market visibility as buyers seek a retreat to value in less speculative times. While bull markets have a way of covering all manner of sins from a buy-side valuation perspective (allowing for more risky bets on less fundamentally sound companies), less go-go markets tend to favor higher degrees of prudence. This allows great companies to get second looks and can drive valuation rewards to sell-side companies positioned for consistency, growth, and opportunity capture.

 

Ready to explore your exit and growth options?

 

Platitude #2: My Company Won’t Get the Attention It Deserves in a Hot Market

This is basically an opposite concern of that articulated above. The worry here is that when markets are really moving and M&A is up, competition among sellers will drown out great companies, as buyers seek to capture the upside of higher-beta bets. An important thought regarding this opinion: think through who your buyers really are—and how they buy. While it is empirically showable that macro risk-taking increases during a bull market, once again, no single business really operates as a proxy to macro trends, and few discrete buyers are a caricature of the aggregate. There are, for example, numerous family offices and value-oriented funds looking to pick up high-quality small- and medium-sized businesses in all market conditions. These are buyers whose default position is “no” regardless of what others are doing, but who will come to the table ready to transact for real value—no matter what the rest of M&A land is doing during any given period.

Platitude #3: I Need to Wait for the Next Economic Cycle to Bring My Company to Market

This is perhaps the most perplexing assertion that we hear, and it always requires a bit more teasing out. In its purest form, this notion tends to be a distillation of the previous two platitudes—namely, that the time is currently not right to sell (because the market is too hot or too cold) but the time will be right to sell later (because the market will be hotter or colder then). Stepping back, it’s instructive to reflect on what buyers are really seeking in the middle market. Hint: it’s not speculative upside. Rather, middle-market buyers are seeking opportunities to capture value created by successful entrepreneurs who have built great companies with lasting power (and, yes, upside to boot). These qualities are not cycle-dependent, so neither should be your decision to come to market.

A Better Way to Play

Trying to game the notional “M&A cycle” is not a constructive approach to taking your company to market. In all macro market environments, there are excellent opportunities for both buyers and sellers. Maximizing deal value starts with building a thriving, solid company. A thoughtful approach to your exit or partnership is far more critical than theoretical market gyrations to producing a successful outcome.

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Where Will Lower-middle Market M&A Be In A Year From Now?

The Current Market

The lower-middle market has remained positive for sellers in 2019, thanks to an abundance of buyers that are giving sellers the leverage to demand favorable terms. Most business sectors are seeing strong profits, and the bullish optimism of large-cap investors has spilled over into lower and middle markets. This has resulted in heightened interest and aggressive valuation and buying from private equity firms.

There are several patterns have carried over into 2019 from a very active year in 2018.

• M&A activity has been especially strong in the healthcare and technology industries.

• Acquisitions remain a popular strategy for companies needing talent to keep up with growth.

Buy-and-build strategies are proven to be working.

• Emerging markets are being attractively valued, especially in the Asia Pacific region.

• Competition for high-quality targets is intense, particularly for businesses that are owned by the rapidly growing retiring population.

• Small business confidence is strong, resulting in increased investment by owners.

What Lies Ahead

The world faces potential changes in the political landscape as the United States 2020 presidential election nears, Britain is under new leadership through the Brexit transition, and the global economy navigates significant political unknowns in the wake of trade deals and tariffs. However, the United States election takes place near the end of 2020, which could possibly stave off any significant effects on the economy until the year 2021.

 

Ready to explore your exit and growth options?

While no one can ever be certain what the future holds, we still see the benefits of a strong year midway through 2019, yet the lower-middle market has the potential to become more complicated in 2020. The current bullish market is strong but is expected to lose momentum based on the average amount of time that historical highs have been proven that they can be sustained. Many experts warn of a downturn in the economy next year, predicting that a recession is looming. In contrast, some experts expect M&A activity to remain robust regardless of the economy.

Obviously, uncertainty in the marketplace can impede M&A activity. But a recession does not necessarily mean that selling will be impossible. The variables that drive lower-middle market M&A include:

• Lending capacity: The less money a buyer can borrow, the less money they may want to spend.

• Cost of capital: The cheaper a buyer can borrow, the more money they may want to spend.

• Buyer access to equity capital: Strong profits and surplus cash motivate activity.

• Supply and demand for deals: Aging populations entering retirement and business succession plans, strategic buyers focusing on growth, etc.

In the lower-middle market, buyers and lenders both tend to stay much more disciplined regarding their willingness to lend, cost at which they lend, and returns they target. Buyers will be seeking targets with stability, limited cyclical exposure, a business model with recurring revenue, and a history of performing well through a recession.

Should You Sell Now?

The good news is that there is still time before a possible slump in activity and optimism. If you are looking to sell your business, you may have another 12 to 18 months to benefit from the premiums today’s sellers are getting. Keep in mind; it does not mean that after this time is over, you will not be able to sell. Companies are always looking to grow through acquisitions, and the market is always changing. You do not need to feel completely discouraged by any economic slowdown.

Consider how long you are willing to wait to sell your business if the market were to drop. If you do not plan to sell within around five years or more, you can wait patiently for the next market rebound. But if you are determined to sell in the next couple of years, it may be wise to get serious about your exit strategy while conditions are still favorable. Think about what is right for you, your business, and your family when deciding when to make a move.

Contact Us

Our business acquisition experts at Benchmark International can offer exit planning advice and help you plan a solid transition for your company. We will use all the tools at our disposal to get you the maximum selling price while preserving your vision for the future. We can also help if you are looking to buy a business. Contact us today.

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Will 2019 Be the Year of the Family Office?

For the last decade, private equity players have held the driver’s seat in looking at, winning auctions for, and acquiring lower middle market businesses in the United States. But early results for 2019 indicate this trend may be at an end. The family office has come to the fore and appears poised to become the dominant bidder and buyer in this market.

Ready to explore your exit and growth options?

Family offices are similar to private equity funds in that they take a pool of money and invest it across a range of companies seeking diversification to mitigate risk. But what’s more important are the differences between the two buyer types. These include:

  • Private equity funds have mandatory exit time frames imposed by their organizational documents and their agreements with their investors. A typical private equity fund has a life of about ten years so it must buy, grow, and then resell all of its investments in that time frame. Family offices, on the other hand, typically have no time horizon for re-selling. They are more often “buy and hold” acquirers.

  • Private equity funds primarily invest “other people’s money”. Family offices invest their own money. While a family office will typically have a management team working for the capital provider and that has the appearance of a private equity-style management company, the management team’s relationships, compensation, career path, and rigidity of investment criteria are each vastly divergent from those of private equity funds.

  • Private equity funds operate under some limitations as to the breathe of their investments - a tech fund can’t buy farmland – but they do seek diversification in very broad terms within these limitations. Family offices tend to have a narrower focus. They hew close to the Warren Buffet mantra that investors should only buy stocks within their "circle of competence." A family office that has made money in landscaping is likely only to look at landscaping businesses and if the family made its money in commercial landscaping, to only look at commercial landscaping businesses. As a result, they tend to come across to Benchmark Internationals’ clients as more knowledgeable about their business.

  • Also owing to their tighter range of interest and the fact that they do not have outside investor to whom they owe fiduciary duties, they tend to move faster, perform less diligence, and produce shorter contracts. Over the last ten years, as multiple have increased, private equity funds and trade buyers have ratcheted up their due diligence to levels our clients find very painful. This is understandable as higher multiple mean more risks for these buyers. But family offices seem more comfortable with this heightened risk and rely on their expertise in the narrower industry to alleviate the risk other buyers reduce via diligence.

  • Family offices also tend to use less debt in their deals than do private equity funds. Perhaps as a result of this fact, or maybe not, they tend to use their existing debt facilities to provide the extra leverage needed to put in competitive bids. As a result, the lenders due diligence is either greatly reduced or eliminated from the acquisition process. This also increases the speed to close and reduced the stress for sellers. When a private equity fund, or even a typical trade buyer, sets up a new transaction, they also set up a new lending arrangement and the bank providing the debt sends in its own diligence team to investigate the deal and the company being acquired. Double the diligence, double the fun!

  • Because a family office’s money is coming from one source as opposed to many, they tend to seek out smaller opportunities than do private equity funds. There are some very small private equity funds these days and there are also some rather large family offices now. But in general, the managers at a family office are more accustomed to dealing with smaller business, more owner-operated businesses, and businesses with less data to share during the due diligence process. As a result, our clients often find them easier to work with and have more interest in working with them on an ongoing basis following the closing.

  • Private equity funds often have a mechanism in place to have their “deal costs” covered by third parties. Deal costs primarily consist of due diligence costs, legal fees, and travel. It is not uncommon to see a private equity funds deal costs amount to over 5% of the transaction value. Family offices, on the other hand, have no one to turn to for their deal costs. This has two favorable results for sellers. First, they spend less on the process, making it shorter and easier. Second, their certainty of close is higher. While private equity funds can somewhat mitigate the costs of a “blown deal,” family offices only have one pocket to pull from – their own (or, in other words, their boss’s personal pocket).

  • The characteristic that is probably self-evident by this point is the higher certainty of close. Family offices know the market batter, they have less bandwidth to use time inefficiently, they have more discretion, they are less reliant on banks, and they don’t want to waste their own money on blown deals. They are thus more cautious, put in fewer bids, and call things off much sooner than other buyer types. In short, if they are proceeding, they are more serious than they average buyer.

  • They are harder to find. They do not have to register with the SEC. There is no secret club they belong to.  They are too short-handed to attend many conferences. Many even enjoy anonymity and don’t even have websites.

Do you have an exit or growth strategy in place?

This last characteristic is what makes selling to family offices tricky. Any broker can produce a Rolodex of private equity funds. In fact, an impressive one could be produced from scratch in a matter of hours. Furthermore, because their focuses tend to be so narrow, the first 100 family offices in the Rolodex would probably not be a good fit for any given business but a similar list of private equity funds would probably produce a few interested buyers in most any growing business. A broker is either into the family office world or they are not. There is no break through moment in this regard. It requires years of dedicated effort to identify and establish relationships with these hidden gems. It requires dozens of researchers and outreach efforts.  It also requires having an inventory of businesses for sale that keeps these buyers interested. Brokers focused on larger deals and boutique brokers lacking global reach simply can’t devote the time and energy necessary to gain access to this strengthening pool of buyers. Only brokerages such as Benchmark International have the capability to do so and many of those with the capability have simply not made the effort.

Our family office relationships are continually growing and in 2019 these efforts have rewarded our clients handsomely.  Keep your eyes open. I bet you’ll soon start to see the Wall Street Journal talking about family offices and the rise of the family office.  When you do, remember that you heard it here first and Benchmark International is your gateway to those buyers.  

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Supreme Court Makes M&A More Difficult

Federalism has always posed challenges for middle market M&A. While compliance with federal laws and regulation does not typically lead to issues in acquirers’ due diligence on middle market companies, the companies do often have problems with those pesky out-of-state state-level issues. Experience indicates that this is true for a variety of reasons. First, many of these companies have only recently expanded into other states and, as is common in a growing business, operations often get ahead of back office tasks (such as compliance). Second, owners of middle market businesses are often selling precisely because they realize that their businesses have grown to the point that they require additional overhead expenses that the owners are not interested in dealing with. Third, every states’ rules are different and ever-changing and it is very hard to get a handle on six, or a dozen, or 49 different sets of rules and shape a business compliant with each set. Fourth, and nobody likes to admit this, states can be a bit lax on enforcing their rules, especially on out-of-state companies.  Acquirers are well aware of these facts and, as a result, dig deep on state-level issues in their due diligence.

While very few business owners are attorneys, most have at least a vague sense that when they establish a “physical presence” in a state, they need to start worrying about that state’s laws. Most probably also realize that physical presence is a bit fuzzy and that each state interprets the term differently but the US Constitution places a limit on the breadth of that definition due to the Interstate Commerce Clause. So, this has always been a nebulous issue but at least there was a bit of a bright line test around when a company might have to start thinking about looking at the rules in a new state for things such as income tax, collection of sales tax, workers compensation and the like. 

Ah, things were so much easier before 2018.

Do you have an exit or growth strategy in place?

*  *  *

Then, on October 1, 2018, the Supreme Court issued its ruling in the case of South Dakota v. Wayfair Inc., et al. South Dakota was attempting to require the online retailer Wayfair to collect sales tax for online sales for which goods were shipped into the state’s boundaries. Wayfair had a very strong case that it had no physical presence in the state and therefore the state could not force it to do anything, especially not collect taxes for Pierre. The state argued that it had a very powerful statute that said even without physical presence it could force companies to collect sales tax on sales made into the state if the seller had an “economic presence” in the state. Wayfair responded that decades of Supreme Court rulings indicated that this statute violated the US Constitution as an unfair restraint on interstate commerce. The Supreme Court stepped in and changed its mind. 

*  *  *

Since that day, the bright line with regard to when to start worrying about a state has been erased – at least with regard to sales tax. And, in the four months following the opinion, states have begun to rub that big eraser across other areas of law as well. The next to disappear is likely state income tax, then perhaps use tax, workers compensation, and unemployment insurance. As of the writing of this article, of the 45 states that have a sales tax, all but eight have already passed the economic contacts test for sales tax.  (That sure didn’t take long.) How many middle market companies (selling items subject to sales tax) have adapted their practices to this tsunami of a tax change? From what we’ve seen, just about zero. How many acquirers have adjusted their due diligence process? Let’s say the adoption rate there is at least as fast as those of the 45 states - and that is being generous to the states.

The results on M&A already include (i) longer due diligence, (ii) acquirers demanding larger escrows and holdbacks, and (iii) purchase price adjustments. The longer middle market companies go without getting up to speed on the new reality, the larger the potential penalties on the business once the acquirer gets hold of it and therefore the larger the issues will become in the deal process.

Author:
Clinton Johnston
Managing Director
Benchmark International
Ready to explore your exit and growth options?

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