The slow economy is dampening the multipliers – the factors used to base the selling price of companies – in southeast Wisconsin.
Multipliers are based on cash flow and asset value. Their decline has slowed the region’s merger and acquisition activity to a trickle.
"Manufacturing in general is still down and very reluctant to make an investment in plant and equipment," said First Business Bank Milwaukee president and chief executive officer Mark Reinemann. "The biggest trend is that there is much lower activity in mergers and acquisitions right now. That is primarily because sellers don’t want to sell in a slow market or in the bottom of the market. It is nothing like it was two years ago."
"Multiples are down," said Rob Spitzer, vice president of Johnson Bank’s Waukesha office. "Any activity has declined significantly as well. There just aren’t as many deals getting done right now."
When solid companies are for sale, they are moving, Reinemann and Spitzer said. However, in some cases, the seller has to finance some of the deal
"The companies that have had good operating cash flow, those deals are getting done, and there are quite a few buyers for those types of companies," Spitzer said. "I would say we are starting to see that multiples have come down, but we are also seeing sellers that are taking back paper to get some of these deals done."
Some sectors have been more active than others, according to Karin Gale, partner in charge at Vrakas/Blum Mergers & Acquisitions, in Brookfield.
"What I am seeing is a greater interest in the proprietary products," Gale said. "And for a period of time, there was a lot of activity in injection molding, driven by both sellers and buyers – a consolidation trend."
Reinemann and other industry insiders said that typical multipliers are down from between five and six to between four and five.
"In general, a good solid company – depends on if they are a growth company – the overall average is four to five right now. Two years ago, I would have said it was 5-plus," Reinemann said.
"We have had two companies we have represented in the sale of their businesses in recent months," Gale said. "From a multiple perspective, it was right around a five multiple for one of the companies. The other was a unique situation in that there was value in certain aspects of the business. So that particular transaction had a higher multiple than a five. We are also working on a couple of deals on the buy side – and they will be in that same multiple range of about a five."
Last year, according to Gale, multipliers were running closer to six.
"What is driving the multiples down is that financing becomes more difficult," Gale said. "A lot of that is based on the fact that there is less value placed on equipment. Typically, when you look at a company, there has been a certain amount of value given the equipment. But as the equipment has come on the market – sometimes as the result of bankruptcy – and not sold, banks have adjusted their thinking."
Spitzer said the multiplier and specifics of the deal are set more by the market than the lending sector.
"Buyers out there are very cautious," he said. "The market is going to determine the multiplier. What you are going to find out there is that the buyers are very savvy."
Spitzer acknowledged that lower values placed in equipment make it more difficult to finance capital-intensive businesses.
"Most of the lenders are looking to be secured right now," Spitzer said. "If the assets now have lower values, it is certainly going to affect the financing on the deal."
"Everyone today – bankers, buyers, sellers are more cautious," Reinemann said. "All of those factors contribute to less stretching than may have been done in the past."
One factor that may provide an upward pressure on multipliers in some instances is the shortage of owners actively trying to sell their companies.
"My view is that when a business owner begins to plan to sell their business, they do it several years before they actually do the transaction," Reinemann said. "In 1998 and 1999, you had a lot of business owners thinking of retiring or selling. Most of those people, my bet is, have put those plans on hold.
"What I would expect to have happen when the economy warms up is all those people will start to emerge," he said. "Things will be very active."
"We have seen some companies that have shown a desire to sell, but they are holding off for a better economy when they can get a higher price," Spitzer said. "Right now, buyers want to make sure they are buying the type of company that is going to fit their needs, fit their skill set, fit their knowledge, so they are going to be successful."
Reinemann remains optimistic.
"Loan activity is starting to pick up," he said. "Loan demand was soft from the middle of the second quarter until the start of the fourth quarter. It seems to have picked up markedly of late here."
Nov. 8, 2002 Small Business Times, Milwaukee
