Brokers are optimistic about merger and acquisition activity in 2014 with 87 per cent projecting an increase in completed deals and the majority of advisors anticipating that overall deal volume will increase.
That is according to the Fourth Quarter 2013 Market Pulse Quarterly Survey Report published by the Pepperdine Private Capital Market Project, International Business Broker Association (IBBA) and M&A Source.
While the market is still clearly polarised, there is a shift toward greater seller leverage in every sector compared to Q4 2012.
The quarterly report aims to evaluate market conditions for businesses being sold in Main Street market (values under USD2m) and lower middle market (values USD2m to USD50m).
“It appears that 2014 is shaping up to be a perfect storm for M&A activity,” says Scott Bushkie, president of Cornerstone Business Services. “Valuations are staying strong, sellers are gaining greater leverage, and boomer retirement is driving sellers to market. We are also seeing stronger support from traditional lenders, and that is enabling more corporations, Private Equity firms and individual buyers to come to the table, increasing an already record-size buyer pool.”
Individual buyers, most of them first time business owners, acquired smaller businesses at a much greater rate than larger financial firms at the end of last year. Existing companies had a larger presence in the USD2m to USD5m sector at 41 per cent, but still trailed behind individual buyers at 47 per cent. In the USD5m to USD50m sector, private equity groups were the primary players, representing 60 per cent of closed transactions.
Given that individual buyers dominated the market for deals under USD2m, it’s not surprising that advisors cited “buying a job” as the number one reason driving Main Street buyers to market in the fourth quarter 2013. In the USD2m to USD5m sector, “horizontal add-on,” which is acquiring additional, but related businesses at the same level in the value chain, was the leading driver at 47 per cent, followed by “buying a job” at 23 per cent.
“The biggest mistake sellers make is clinging to unrealistic expectations when valuing their company,” says Dr Craig Everett, director of the Pepperdine Private Capital Markets Project. “Business owners that are burnt out are also at a disadvantage because they lose their leverage in negotiations or end up liquidating their assets because they won’t wait for an extended sale period. It’s important for business owners to put a realistic market value on their company and to have the time and patience to wait for an equitable deal.”
Advisors reported three common hurdles to closing deals in 2013: 27 per cent pointed to valuation issues, 19 per cent cited financing issues, and 13 per cent reported deal fatigue. Conversely, the biggest contributors to getting deals done in 2013 were clear price expectations (33 per cent), a larger buyer pool (26 per cent), more sellers in the marketplace (13 per cent), and more aggressive financing (11 per cent).
