Pent-up Demand for Deals

There are many reasons why the mergers & acquisitions markets should be heating up.  Let’s recount just a few of them in this post as we wait for what should be happening to begin to happen.

• According to PitchBook, there is a $425 billion “overhang” of private equity just waiting to be invested. Much of this equity was raised two or three years ago or more, and there is growing pressure for the private equity firms to invest the capital. For a chart illustrating this overhang, see here.
• However, there is another overhang in the private equity markets. PE firms have invested in more than 6,000 companies in the United States. Of these, some 4,000 are maturing investments in companies where the PE firms are under increasing pressure to sell in order to generate returns for their investors.
• Corporate coffers are over-flowing with cash, with more than $2.2 trillion in cash sitting on US companies’ balance sheets.
• Commercial and Industrial lending is on the upswing, primarily in banks with more than $1 billion in assets.  Smaller banks are seeing upward trends in lending, but primarily on the real estate side.  More bankers everywhere are beginning to think in terms of commercial lending.  If they got creative, perhaps they could facilitate some dividend recapitalizations and partial buyouts in successful closely held businesses that don’t want to sell in the entirety?

The Age of Aquarius?

The population of Baby Boomer business owners continues to age. I don’t have to cite a statistic for this. All I have to do is calculate the average age of business owners I meet and look at myself.  Many business owners are perhaps waiting for that elusive perfect time.

The absolute perfect time to sell a business is when the stock market is hot, when the economy is good, when industry conditions are favorable, when financing is readily available and cheap, when conditions at a company are on the upswing or perking along with good margins and growth,  when management is ready and has plans for what follows and ….  It reminds me of a song by the 5th Dimension, Age of Aquarius, which states, in part:

When the moon is in the Seventh House
And Jupiter aligns with Mars
Then peace will guide the planets
And love will steer the stars

This is the dawning of the Age of Aquarius
Age of Aquarius
Aquarius! Aquarius!

I’m not sure if the Age of Aquarius, or the perfect time to sell a business, will ever come. I wrote about this in February 2011.

A Perspective on the Baby Boomers

To touch on the Baby Boomers once again, many baby boomer business owners missed the surge in mergers & acquisitions activity that preceded the crash in 2008.  There was pent-up demand for selling businesses in 2008. Now that we are on the short side of 2012, that pent-up demand is causing unknown pressures for business owners, their families, and their employees, who are uncertain about the necessary transitions that await.  One M&A adviser tells the story this way:

What happened between 2008-2011?

The answer, from a business transition viewpoint, is very little. Businesses generally suffered a decline in revenue, profitability and cash flow, making them less valuable to buyers. It became very difficult to finance the purchase of a business as credit became tight and de-leveraging began to occur. Transactions were difficult to close. Sellers sought a return to the prices that were paid in 2005-7 which was not realistic given the reductions in value. Companies that performed well during the downturn achieved greater multiples of value as there was a shortage of supply of quality sellers.

Baby Boomer Transition Bubble just got kicked down the road?

In essence, the bubble is still there – it just got kicked down the road. Now, the backlog of sellers is bigger and the situation may become more urgent.  It is true that most business owners have adjusted their retirement expectations and it has been estimated that retirement ages have been pushed out about 3 years on average. Since very few businesses sold during the 2008-2011 timeframe, there is an enormous backlog of business owners who would sell given the right circumstances. Our best estimates are that between 1.2 million and 1.5 million business owners are in that backlog.

So What Should Business Owners be Doing?

Pent-up demand for business transactions is a fact of life.  We know from history that transactions tend to come in waves.  When will the long-awaited wave of transactions involving Baby Boomer business owners arrive?  I don’t know, but it almost has to come soon.  In terms of age, the leading edge of the Baby Boomers turns 67 this year.  The lagging edge turns 47.

Many of the Baby Boomer businesses are small firms with limited potential in the M&A markets.  However, much of successful, private corporate America is owned by and led by Boomers.  We won’t live forever.

I spoke with a business owner the other day.  He is 75 years old and still working.  His business needs to be transitioned to the next generation of owners (not his family).  And yet he waits.  The longer he waits, the less ability he will have to negotiate a favorable transition.  The situation is even more dire if he becomes disabled or dies and his family is left to handle the transition. This is, perhaps, an extreme situation, but it is not uncommon.

Owners should, as always, be running their businesses as if they were in the market to sell. I have said many times that a business that is ready for sale is, well, ready for sale.  It is also a whole lot more fun to work in than one that is not!

So business owners should be preparing themselves and their businesses for the next transactional wave.  Business advisers should be encouraging their clients to get ready, as well.

The tsunami is coming.  We may not see the Age of Aquarius, but we will see more deals in the foreseeable future.  Will you be ready?  Will your clients be ready?

If you need help with valuation or transaction issues, give me a call.