By Scott Bushkie
As the new year begins, I want to comment on the M&A year behind us and the one ahead. As expected, the market was strong in 2015. Deal volume hit a new global record by early December, reaching $4.304 trillion, ahead of the previous record set in 2007.
I predict we’ll have another good showing in 2016, at least in the lower middle market. The number of buyers with significant cash remains unprecedented, and lenders are still looking to put money to work.
Interest rates are rising but should increase at a slow pace, so the immediate market impact won’t be significant. However, we do have an election coming this fall. Political uncertainties and unexpected world events can shake market confidence.
If you had asked me last November, I would have told you we probably had just one more year left on a solid M&A market. Being in the industry for 18 years, there’s one thing I know: Good markets don’t last forever.
But I recently heard a well-respected economist speak at an M&A conference. He predicts a bull market could continue for another two years. That kind of market run is unusual, but I hope he’s right because a strong market makes my sellers a lot happier.
Over the past two years, we’ve been able to exceed seller expectations more times than not. We have multiple buyers competing for each available deal, and so do many other proven firms.
According to the national Market Pulse survey, conducted by the Graziadio School of Business at Pepperdine University, the market is continuing to shift to a seller’s market for all but the smallest businesses valued at $500,000 or less.
Businesses valued from $500,000 to $1 million are sitting in a neutral market, while sellers have the advantage in any deal over $1 million. What’s more, leverage increases considerably as deal size grows. In fact, for businesses valued at $5 million to $50 million, 83 percent of advisors would categorize it as a seller’s market, nearly an all-time high in confidence in that category.
Market Pulse stats also show that values continue to be strong, but have likely plateaued. In Q3 of 2014, the median EBITDA multiple was 5.1 for deals valued at $5 million to $50 million. The median multiple hovered around 5.0 for most of the year before ending Q3 2015 up a bit at 5.3. If people are waiting for multiples to increase, I don’t see that happening in any significant way.
For now, investor confidence is high, debt is still cheap, and business leaders must find ways to orchestrate growth in this slow-growth economy. Barring any catastrophes, market conditions should be strong as long as those factors are in play.