Fueled by low interest rates and a pent-up demand for profitable companies, mergers and acquisitions activity in the United States reached nearly $1 trillion in 2005. Venture capital funds had large caches of dollars set aside for investment in 2005, and many of those funds still have money to spend. Many companies that weren’t sold before the last recession came back on the market in 2005, fueling a healthy demand for existing businesses across the nation.
Those economic factors still exist, and M&A analysts in southeastern Wisconsin say activity in the state and nation will likely continue at high levels in 2006. This year might not have record-smashing M&A activity, but many in the industry say there is much to look forward to in the new year.
"There’s no reason (the robust M&A market) shouldn’t continue," said Dennis Ellmaurer, principal at Globe National Corp., a Milwaukee firm that works with business owners interested in selling their companies. "Interest rates are still low. There’s still a high demand for businesses. Companies have been profitable and are flush with cash. I wouldn’t be surprised to see multiples grow for 2006."
Although interest rates rose in 2005 and will rise this year as well, M&A activity will remain at a healthy pace, said Frederick Fass, shareholder and certified valuation analyst with Brookfield-based Vrakas/Blum S.C.
"There is a fairly stable business environment now, other than interest rates rising," Fass said. "The economy is fairly stable, and the growth in the jobs area is stable."
Because 2005 had so much activity, it will be nearly impossible to top it in 2006, according to Stanley Johnson, president and principal of Milwaukee-based Anderson/Roethle Inc.
"Rising rates and things like that will take a few possible transactions out of the market," he said. "What happens in high-interest periods is that expectations get high, and it takes a while to come back down in the context of rates. Sellers’ expectations lag behind reality."
Still, Johnson is bullish about 2006.
"I think there will be a good flurry of activity – there’s optimism in my mind," Johnson said. "Private equity firms are still sitting on a ton of cash, and they continue to raise huge amounts. Things will still be pretty active. We’ve got a lot in the pipeline."
Joseph Sweeney, managing director of Milwaukee-based Corporate Financial Advisors LLC, said determining if M&A activity will be at a healthy level is as simple as looking at the economy as a whole.
"The economy is strong, and there is a lot of consumer confidence out there," Sweeney said. "That translates into people buying things and people buying companies as well."
The strong M&A market of 2005 was fueled by many people who held off selling their companies during the economic slowdown of 2000 through 2003, according to John Emory Jr., managing director with Milwaukee-based Emory Business Advisors LLC.
Emory said many business owners who were hoping to retire soon were unable to sell their companies during the economic downturn after 9-11, as multiples plummeted.
"A lot of them cut their costs in 2003 and 2004 and reaped the benefits when things came back," Emory said. "A number of clients say, ‘I could wait a few more years, I’ve got a lot of good prospects.’ But that’s the right time to sell. It’s just like any bubble."
Most analysts said 2006 will be a good year to sell a business, largely because of the good economic indicators and the healthy demand for businesses. However, in the same breath, most analysts also say that the decision to sell is a highly personal one for business owners.
"It depends on your goals and objectives," Sweeney said. "A lot of it depends on where you are in your life. But we’re very enthused for 2006. This was a great year (2005), and we think 2006 will be great too."
Because recent years have seen many businesses posting large earnings increases, Fass said 2006 will be the right time to sell many of those businesses.
"If your business is well-managed, profitable and you can show consistent earnings, now could be very well the time to do that," Fass said.
Business owners looking to sell their companies for the highest possible value can take steps several years ahead of time to make sure they get the best price, analysts say.
Ben Scharff, vice president of Grace Matthews Inc., a Milwaukee-based mergers, acquisitions and corporate finance advisory firm, said business owners considering a sale in coming years should be focusing on their company’s growth strategies.
"From a business owner’s perspective, they should be thinking about how to take their business to the next level, growth-wise, and being able to convey that to a buyer in a believable and achievable fashion," Scharff said.
Owners and corporations that are able to create realistic and achievable growth plans are being rewarded with higher multiples paid in their transactions, Scharff said.
Another key consideration for business owners when planning for an eventual sale is having the right management team in place. Many times, an entrepreneur who has started a business has the most significant relationships with suppliers, customers and other contacts. And if that entrepreneur is going to retire after the company is sold, the company could lose a significant amount of value, he said.
Johnson said entrepreneurs who hire new management and spend time training them before a sale will likely be able to sell their company for a higher dollar amount than if no successor is in place.
"If I am a private equity person, I’m looking at what am I really purchasing and I am asking myself, ‘Is there a strong management team in place?’" Johnson said. "From the owner’s perspective, if he hires someone, he immediately takes (the person’s salary) out of his own cash flow. It’s a tough hurdle to get over. But at some point in time, the hundreds of thousands of dollars will be replaced because there might be a higher multiple because (the purchaser) will look at the growth pattern and management team in place."
Business owners thinking about selling also should pay very close attention to both their balance and income statements.
"You may consider improving your accounting and outside scrutiny," Emory said.
Timing – It may be time to sell your business when …
- Your company has posted higher levels of revenue and profit than before, preferably for multiple years.
- Growth indicators are well-defined and extremely positive.
- A successful, well-defined succession plan has been implemented among top-level management.
- There are other strategic acquisitions happening in your industry, preferably within the same geographic area of your firm.
- Your business is family-owned, profitable and does not have another generation interested in purchasing it or taking it over.
- The company has a strong distribution network, but not enough product or money to maximize it.
- You know your company would be attractive to more than one interested buyer.
- Too many of your personal assets are tied up within your company, and you know that if the company is sold, you could meet your financial goals.
Turnoffs – Indicators that could lower the sale price of your company
- Advanced age or health concerns of company ownership.
- The owners have become burned out or tired of their company.
- The industry that the company operates in has changed, and the company has difficulty keeping up with those changes.
- Lack of technical expertise has hurt the company.
- No succession or management transition plans are in place.
