To understand why 2015 was such a tremendous year for mergers and acquisitions, one needs to look at why we have been in one of the most attractive “deal” environments ”“ particularly for sellers ”“ that we have seen in a long time. Buyers and sellers are both motivated.
For businesses valued at more than $3 million, a strong seller”™s market has been created by private equity groups (PEGs) flooded with cash, but it won”™t last forever. For those businesses valued at less than $3 million, which are generally too small for PEG investments, a different kind of flood is looming on the horizon ”“ mass baby boomer retirement. The third-quarter Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and Pepperdine Private Capital Market Project indicates both a strong sellers and buyers market, depending on the size of the enterprise.
A recently released BlumShapiro-Uconn report  assessed the impact of Connecticut”™s aging generation of baby boomers on business, demonstrating a rising demand coming from sellers, as they continue to age and need to either sell, recapitalize or liquidate. Whereas, the most recent IBBA “Market Pulse Report” underscores these conclusions and gives a national view of the buyer”™s versus seller”™s markets. We drew the following conclusions, based on the size of the deal:
Businesses valued at less than $1 million are favorable to buyers, although there was some shifting toward a seller”™s market as the economy strengthens and there are more willing buyers. Given the outlook for the retirement of Connecticut business owners, this trend likely won”™t continue and the market for businesses valued at less than $3 Million will continue to be a buyer”™s market. The buyer”™s market will continue to strengthen over time as the buyer-to-seller ratio continues to decrease. Owners who are looking to sell now should go to market before the flood of baby boomers hits.
Businesses with valuations of more than $3 million, according to the third quarter “Market Pulse Report,” are in a very strong seller”™s market. With record-breaking estimates of $1.1 trillion to $1.4 trillion of “dry powder,” a term used to describe the reserves of unspent cash, the money isn”™t only available but needs to be spent by PEGs that are under pressure to buy in order to generate expected returns.
Attractive companies, those with strong value drivers, are bringing in high valuations from PEGs with a need to invest cash and a willingness to pay for quality. Companies valued at $3 million to $5 million, for many PEGs, are considered as add-on acquisitions. Add-on acquisitions are companies purchased to complement existing companies within the PEG portfolio, called investment platforms, in order to pool resources and gain market strength. For companies in this range, a business broker can help you seek out PEGs with relevant platforms.
As demonstrated in the “Market Pulse Report,” the larger the deals are, the stronger the seller”™s market is. Companies whose earnings are $750,000 to $1 million or more are in a really good position to reach valuation levels that attract the interest of PEGs with cash to burn. Especially those with earnings of more than $1 million. However, with such high unspent cash levels, a market correction will take place at some point and could significantly change the market landscape.
Devon Fleming is a Senior Adviser at VR Nutmeg in its Connecticut offices. She was hired in early 2015 to become an M&A advisor at VR. She can be reached at 203-772-3773 extension 105.
