The general consensus among those in attendance was that the M&A market remains robust for solid companies, but has cooled for companies that are not fully prepared to go to market. As a result, M&A activity has picked up again during the first quarter of the year, with multiples increasing.
One participant opined that it is a seller’s market for quality companies, with buyers willing to “pay up” for a company whose numbers show proven value and potential. Acquisitions are not limited to the local market, with more overseas buyers looking for investment opportunities in the U.S.
No matter where they come from, buyers are ratcheting up their due diligence, asking for fully audited figures to assure the credibility of the deal, and to minimize risk. One participant noted that financing is difficult to obtain based on “QuickBooks numbers.”
“Audited figures make for an easier sell. It’s harder to dispute the numbers when an auditor has signed off on them,” said one DealMakers attendee. “The lesson is that if you are thinking of selling your business, start the audit process a couple of years in advance of the sale. Look at the audit as an investment to help close the deal.”
Deal structure was also a hot topic of conversation, with deals involving more intricate earn-out formulas becoming the norm.
Private equity firms are competing with strategic buyers for the deals and the landscape is so competitive that deal structure is now more important than ever. A number of private equity fund managers have come from larger investment firms and are now focusing their attention on small and middle market companies. These private equity firms are differentiating themselves and competing for deals by offering analytical tools and support (to which buyers and sellers may not otherwise have access), being more efficient in conducting due diligence, and incentivizing current management.
One surprise that the newer private equity firms have found in the smaller deal market is the scarcity of data available and lack of financial controls in the businesses they are targeting. The dearth of hard information makes the due diligence process that much harder, and is another argument for a formal audit in any M&A deal getting ready to go to market.
Another trend that DealMakers are seeing is tax-driven deals, with sellers investing in extensive analysis and planning for what to do with their money after a deal is made. This long-term planning and tax projection can affect how a deal is structured, or even if a deal will be made at all. In some cases the tax projections will cause a seller to hold off on being acquired until a more tax-favored time.
The March roundtable discussion marks the sixth in the ongoing series of invitation-only DealMakers events. Each session offers lively discussion about M&A trends and market-making activities, and the chance to meet fellow M&A community members.
If you are interested in attending an upcoming DealMakers event or learning more about these events, please contact us.