Current State of the Merger and Acquisition Marketplace

2012 was the year that wasn’t when it came to private companies being bought and sold in the lower end of the Middle Market. Throughout the year, there was quite a bit of talk about transitioning businesses before the end of the year to avoid the uncertainty of capital gains tax law changes, unknown future taxes, and political maneuvers that would affect retirement dollars. At Quazar we have this saying – “only companies with a compelling reason to sell, actually sell.” 2012 proved this out again, as people tend not to sell their companies to minimize taxes. There was, however, quite a bit of estate planning work done for people to use their lifetime exemption before anticipated tax law changes. Attorneys and accountants were very busy at year-end helping their clients with tax planning.

Current Market Condition Considerations for Sellers

With some advance planning, it is a very good time to be a Seller. If you are fortunate enough to have free cash flow in the $3-5 million plus range, the Private Equity Funds are aggressively looking for opportunities. We are contacted daily by Private Equity Funds looking to purchase companies with predictable cash flow. Keep in mind, the private M&A Market has seen minimal activity in the past four years and during this time, additional capital has been raised that needs to find a home. If you have a unique Product Offering or Market Position that causes you to stand out from your competition, someone will look seriously at paying you a premium. There are Strategic Buyers in a number of industries looking for volume and consolidation opportunities. These types of transactions often result in a good outcome for the Seller. Money is cheap; Buyers are back to using leverage and inexpensive capital to fund their purchases. Management (with a little savvy, a small amount of cash, and a large amount of commitment to make it work) can be a great Buyer. We have recently seen a surge in MBO’s (Management Buy-Outs). This is somewhat due to the availability of capital and, maybe more importantly, Management’s flexibility in meeting the Seller’s needs for income and benefit continuance.

Current Market Condition Considerations for Buyers

At the end of 2012, we were talking to some of the same businesses who were thinking about selling in 2006; they will be coming to Market sometime in the near future, which should create some good Buy opportunities. As a Strategic Buyer, you should be in a good position to pay a premium for an operation that gives you diversification, better overall utilization, new customers, quality people, etc., and in some cases you can benefit from new technology acquired in the process. There are some smaller companies with new products that could turn into your long-term Market niche; remember, money is cheap! Don’t gloss over the “tough deals;” that is, those companies that appear to be down and out. Often there is hidden value that only an Industry Buyer can appreciate and turn into cash.

Summary

It’s never too early to start planning for an exit strategy or for growth through acquisition. Consult your professionals to confirm that your strategy is in alignment with your long-term goals and objectives. You can always contact Quazar for a confidential, no-cost analysis of how the Market would treat your unique situation. We wish everyone a successful 2013!