Reflections on the M&A Market in the Current Depressed Economy
The driving forces that propel both Strategic Buyers and Private Equity Groups to continue to acquire businesses have all but vanished.
The result…Mid Market Multiples are some of the lowest in living memory – 3.5X to 4X EBITDA. Two years ago the average was nearer 6X EBITDA. Given this 30% to 40% decline and given that many sellers are seeing their own EBITDA decline by a similar amount, overall values have plummeted by figures well in excess of 50% i.e. more that the Dow.
Like many of you, I witnessed first hand, starting in late 2008, as oxygen appeared to have been sucked out of the market place – customers alike did not want to do anything as the future suddenly became very, very uncertain and frightening. This fear, causing inaction, still pervades the market place.
In this environment, Strategic Buyers and Private Equity groups are fighting their own fires and the last thing they want to do is take on more risk.
And even if they did, financing has almost dried up.
I am currently representing a small company in a field less affected by the economy – healthcare – and all the buyers who were interested in this company in the late summer, have literally stopped in their tracks and are just “waiting out” the situation. One potential buyer said to me…”I am keeping my cash in my pocket and I dare not go to the bank”.
And yet there are an increasing number of privately held Business Owners who wish they could sell their company. Managing a company in an economy where customers are fleeing the market place is no fun – it is very stressful seeing your net worth disappear. How many Owners are thinking…”I wish I had sold my company two years ago?”
Too late!
Several years ago I completed a survey of over 400 Business Owners focused on “Ownership.” Among the many questions they answered was one that asked...”what would make you want to sell the business today?” Two types to answers came back almost unanimously
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A great offer
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My company is losing money
You see, most Owners do not want to sell when times are good because they are having fun, making lots of money and think this will go on forever. 2002 and 2008 have shown us that this is not so. Business is cyclical and the time to sell is not now, but when times are good.
Very few companies are out there with a “Great Offer.” There are many "bottom fishers." One company I know who is aggressively buying businesses is Berkshire Hathaway, who spent $20bn in 2008 and still has over $30bn in cash.
So what is a Business Owner to do?
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Horde you cash, firstly to survive but secondly realize that some of the competition is going to go out of business in the next six months. Cheap assets, customers and some desirable product lines are going to be available.
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Remember this time well. Make sure it is etched on your mind and be sure that when economic conditions improve as they most surely will, you will consider selling when times are really good.
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Begin you “Positioning and Planning for Sale” right now, but be prepared to wait some time.
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Take advantage of the “Silver Lining” of this recession…if you had a bad year in 2008 and your outlook for 2009 is also not good, realize that the value of your company is particularly low in terms of “Fair Market Value”…this is an excellent time to gift stock as part of an appropriate estate planning strategy
The following quote is very apt …
“The seeds of disaster are sown in good times.”
but the reverse is also true…
“The seeds of success are sown in bad times.”
- Peter Collins