In today’s economy, public stock markets might be suffering, but it’s a seller’s market for private company transactions.
According to Brent Cunningham, managing partner at Sequoia Business Brokers, “There are four to five qualified buyers for every one private company we sell.”
Cunningham acts on behalf of owners of companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of between $500,000 and $10 million, and he’s seeing a lot of competition for solid businesses with consistent earnings.
The buyers typically fall into three categories:
Strategic buyers: These include companies consolidating competition or adding a complementary product line. Corporate buyers can afford to pay higher multiples of earnings because they can realize synergies from merging the operations, which often results in job reductions.
Private equity funds: More than $425 billion in capital has been raised in North America and needs to be deployed by these cashed-up super buyers.
As financial investors, private equity firms are looking strictly for returns and will leverage the acquisition with three or more times debt for every dollar they invest.
Individual investors: This group includes high-net-worth serial entrepreneurs or former executives from large companies who are interested in buying a business, stepping in as the CEO and earning 25%-plus rates of return on their investment.
Individual buyers find it harder to compete with the larger players for deals over $3 million. Cunningham reports that more than half of all sales are going to strategic buyers and a third are going to private equity funds. In his last six deals, four have been all cash with valuations between five and seven times EBITDA.
Walter Schultz, manager of business development at TD Commercial Banking, strongly urges buyers to surround themselves with reputable advisers. He adds that buyers’ credibility increases if they’re prepared and have a solid and knowledgeable team of professionals supporting them.
“The team should include a lawyer, accountant, broker and banker that have completed transactions,” Schultz said.
“Owners usually only sell once, so the advisers should not be learning on the job.”
One such successful buyer is Paul Hill, CEO for Advantec, a fund set up by Brad Miller, who sold IMW Industries Ltd. in 2010. (See “A Diamond in the rough” – issue 1099; November 16-22, 2010.) Hill bought four companies in the last two years and sees opportunities in the four- to five-times EBITDA range for companies worth between $10 million and $15 million.
Hill said sellers should have a good broker to guide the sale process.
“Sellers are too cautious in releasing information. Both sides need to project-manage the deal and ensure there’s good communication flow so there are no late deal-breakers.”
In addition to price, stewardship is a concern for many business owners. First West Capital funded eight corporate transactions in 2011, seven of which were friendly deals that did not reach the market.
They included family and management buyouts as well as deals between companies that are already on familiar terms with one another.
These types of deals are advantageous for the seller because they can maintain their confidentiality, safeguard their employees and ensure their company’s legacy continues.
From a financing perspective, having a management team that understands how to run the business provides a significant advantage.
While the current market might be attractive, sellers need to realize the amount of time it takes to plan for a sale, execute the deal and transition the business to new owners.
The entire process can often take several years to complete, therefore early preparation is important.
However, there might be no better time than now to start succession planning, because the baby boomer retirement wave may swing the market the other way over the next 10 years.
Cunningham, Schultz and Hill are scheduled to be panellists at the April 3 ACG Capital Connection (www.acg.org/vancouver) at the Four Seasons Hotel. •
