Market moves in right direction

SOURCE: Green Bay Press Gazette, April 11, 2010

By Scott Bushkie

It might not seem like much to say M&A activity is up, given the year we’ve just had. But believe me; things are trending in the right direction.

Activity rose in the U.S., increasing more than 31 percent in February from one year earlier. The dollar value for U.S.-based transactions grew by 544 percent from a year ago. And for the year-to-date period there was a total 1,694 announced U.S. transactions representing a 20.6 percent increase over a year ago.

Granted these are more middle market deals, but the lower middle market generally follows.

It’s a feeling of stabilization in the economy that’s driving activity. For roughly 18 months companies sat on their hands. No one knew how deep or how long the recession would go. Companies cut back on business development, building their cash reserves in case of future need.

According to the Wall Street Journal, the 382 non-financial firms in the S&P 500 have approximately $932 billion sitting on the sidelines. And private equity groups have another $400 to $600 billion, totaling roughly $1.5 trillion ready to go to work—not to mention what smaller firms have socked away.

The pent-up demand is significant. With this increase in purchasers comes an increase in values, as we see more competition for available deals. Lending, however, isn’t anything like it was, and deal structures look decidedly different.

Buyers three to four times your size may pay all cash at close. With so much in reserve, their cost of capital is relatively inexpensive. They are holding back on trading stock in the purchase, believing values are too depressed yet to act in their favor.

Others don’t want to pay all cash, but they don’t want to muddy the waters with traditional lending either. We’ve seen buyers come up with 50 percent of the purchase price and ask sellers to finance the rest – no lending institution involved.

There are pluses and minuses to that. On the positive, if the buyer defaults you sit in first position. The downside is that you’re waiting a few years for a large portion of your payout, usually 3-5 years.

We’ll still see traditional lending, but debt ratios have changed. At a recent Midwest M&A conference, one experienced commercial lender told me his institution wouldn’t finance more than 60 percent of a deal—no matter how good.

For small deals under $2 million, the SBA is still active, but again the rules have changed. Now buyers need experience in your industry; before it was easier to translate corporate experience into general management expertise.

We’re all trying to figure out the new normal. Even some lenders don’t fully understand what their underwriters will approve. If you sell, get specialists involved; otherwise you can spend a lot of time working a deal that was never going anywhere to begin with.

Scott Bushkie is President of Cornerstone Business Services. To request a book (at no cost ) with advice on the exit planning process contact Scott at (920) 436.9890 or sbushkie@conerstone-business.com.