M&A market awaiting baby boomer deal boom

Looming retirement of small-business owners amps up action in sales of companies

Kevin Shaw, the Renaissance Group’s vice-president of M&A: “if we’re talking about dollars and cents, sometimes you have two lawyers in a room, an M&A adviser and both the clients. And we’re talking about $10,000 here or there and the lawyers are charging $500 an hour each. And it’s like, ‘What are we talking about here? Let’s move forward’” | Rob Kruyt

Canadian mergers and acquisitions (M&A) hit a nine-year high in 2016, according to Bloomberg, driven by a record number of energy companies looking to spur growth through low oil prices. The Canadian M&A industry remains positive that 2017 will continue the trend, as a recent Citibank (NYSE:C) study noted that 66% of industry representatives think the dollar value and number of deals will increase this year and 84% expect a rise in domestic deal-making.

Kevin Shaw, vice-president of M&A for Vancouver’s Renaissance Group, said a lot of the fuel will continue to come from changing demographics as the baby boomer wealth transfer continues. The Canadian Imperial Bank of Commerce (TSX:CM) estimates that people between 50 and 75 will inherit an estimated $750 billion over the next decade.

Shaw said the net worth of many baby boomers is tied up in a company they own and operate.

According to provincial government numbers, B.C., at the end of 2015, had 388,500 small businesses (50 or fewer employees), which employed approximately 1.03 million workers across the province.

“Sometimes the best advice is to not sell the business or not to sell to a particular potential buyer,” Shaw said. “It’s a mark of a good adviser: your incentive is to have a deal happen, but from our perspective it’s only if it’s the right deal.”

He noted that a lot of baby boomer small-business owners want to generate liquidity from the sale of their business so they can map out a proper succession plan for them and their company. This is much different than, say, a pension, savings plan or even selling an investment property, because, as Shaw pointed out, retirement for these boomers hinges on a sale of a multimillion-dollar company with multiple employees, clients, assets and property.

According to federal government statistics, Canadians between 50 and 69 make up 26.5% of the population and people over 65 – the average retirement age – now make up 16% of the population, double the proportion in 1971.

“You can imagine a construction guy that’s worked in the business for, say, 30 years and wants to retire,” said Shaw, describing a common scenario he’s seeing lately. “He may have $20 million in revenue and $1.5 million toward the bottom line. But he has no succession plan in place, and he doesn’t want the company to be sold to a competitor, and he wants his employees taken care of. So we’re dealing with that guy, and it’s going to be very emotional because you’re dealing with a founder.”

David Allardice, a partner within mergers, acquisitions and financing, responsible resource development and business advisory for Miller Titerle + Co. LLP, said people have been expecting baby boomer retirement to fuel private M&A activity, particularly within the lower middle market, for years.

He said several outside economic influences, including the 2008-09 economic downturn and the slump in oil prices that started in November 2014, have delayed that retirement.

But Allardice said that as the first wave of baby boomers hit 65 in 2011, the push from potential retirees to find proper exit strategies through company sell-offs has increased.

“Currently we are still in the early stages of this process, and so there is still a relatively limited supply of good businesses for sale,” he said. “And with low interest rates keeping financing costs low, there is a lot of money chasing these businesses and driving valuations up. So with the exception of certain industries – for example, those closely tied to the oil sector – now is a good time to be a seller.”

But Allardice added that as more boomer-owned businesses hit the market and interest rates creep up, the current seller’s market might become a buyer’s market.

Shaw noted that a big part of an M&A adviser’s job is managing expectations. He said the process can take from months to years to complete, and when business owners are looking to sell a company they’ve spent their entire career building, things can get emotional quickly.

He added that, given everything at stake, clients can become attached to things that, in the big picture, don’t really matter.

“Perspective is key,” he said. “If we’re talking about dollars and cents, sometimes you have two lawyers in a room, an M&A adviser and both the clients. And we’re talking about $10,000 here or there and the lawyers are charging $500 an hour each. And it’s like, ‘What are we talking about here? Let’s move forward.’”