A new client just closed on an acquisition last Tuesday. I am currently working with three other clients to acquire companies via strategic M&A transactions. Another client is looking to sell one of its divisions.
I’m not entirely sure what is driving the sudden increase in M&A activity, but I would suggest that it is a combination of the following six trends:
- The economy is performing better and owners who had deferred the consideration of a sale during the downturn are now willing to entertain offers. Some have also now attained the financial results they need to get a sales price that will allow them to retire comfortably.
- Interest rates are still low (for now) and buyers who are anticipating higher borrowing costs would rather close a deal while money is cheap.
- Banks are looking to make new loans and covenants, and they are becoming less stringent about their requirements. (Although, this is a somewhat scary trend if you look at some of the multiples of EBITDA that are being paid.)
- Buyers are willing to pay more, as demonstrated by the increase in the average EBITDA multiple year-over-year. As a result, the gap between seller and buyer expectations has shrunk and more deals are closing.
- Many businesses have created excess working capital over the past few years by paying down debt and retaining earnings. These buyers are now looking for a better return on that equity.
- There are still plenty of private equity dollars on the sidelines and these buyers are anxious to deploy their capital.
This is a good time for buyers. The cost of borrowing remains low and you hopefully have a healthier balance sheet to support an acquisition.
If you are a seller, EBITDA multiples have increased so you should be able to get a higher price than a year ago. Plus, your business has hopefully improved in the interim, which will also increase the potential sale price of your business.
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