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Sunday, 11 June 2017 20:00

M&A market shift ahead?

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M&A professionals say deal volume remains strong heading into mid year with more buyers in the market than sellers. 

However, some executives believe a change has started to occur in the market balance.

The excess of buyers over sellers that has led M&A activity for some time looks like it’s now transitioning as more business owners opt to come to the market while the economy remains in good shape and competition stays strong among prospective buyers, said Tami Rua, managing partner at NuVescor Group LLC in Grand Rapids.

The thinking is that the years of economic growth following the Great Recession may not last much longer, “so if there was a time for them to sell, now is still a great time,” Rua said. “And if not now, then when?” 

She describes a “pretty significant change from the last several years,” as more owners decide to market their business now while they have a chance to sell it at a good price.

“We feel like what we’re seeing is the beginning of a shift from a seller’s market to a buyer’s market simply because of more inventory,” Rua said. “It feels like a pretty significant shift from the last several years. Over the past few years, the inventory for businesses for sale has been quite low compared to active buyers.”

NuVescor typically works in the middle market representing sellers with revenue of $5 million to $20 million.

One possible driver of the shift is the so-called “age wave” of aging baby boomers looking to sell and retire, which could bring a little more balance to the market between sellers and buyers, she said.

CAPITAL POISTED TO ACT

Rua’s view comes amid a continued strong M&A market that’s driven by buyers seeking to grow and financial investors such as private equity firms looking to put their capital to work, according to West Michigan business brokers and M&A attorneys.

During the last week of May and first week of June, MiBiz contacted a variety of local M&A professionals to gauge current activity and what’s ahead for the rest of 2017. All were of the opinion that the good market will continue at least through the year, with high competition among buyers for deals.

“If you’re looking to get out … now is a really good time to do it because you still have a really good buyer group out there,” said Mike Teeter, managing partner at M&A firm InVictus LLC in Spring Lake that works in the middle market.

“There’s a lot of buyers out there right now,” Teeter said. “What we need more of is product. We need more sellers.”

One new wrinkle Teeter has seen this year is younger business owners, perhaps in their mid 50s, wanting to sell “to capitalize on a bullish market.” That trend, combined with readily available credit, cheap capital and low interest rates, will keep M&A activity strong and buyer demand high at least through the year.

“I still think we have a lot of money out there that wants to get into the market,” Teeter said. “So many people have been sitting on capital and want to inject it.”

The high demand from the buy side is good for sellers who have been growing their businesses and have good balance sheets. The ongoing market demand has led some sellers to become more selective about whom they sell to, Rua said.

“Now that there are more choices for buyers, some of the trends we’re seeing are buyers are taking more time. They’re not as quick to jump into something because they feel like they have more options,” she said. “They don’t have to take what’s right in front of them. Before the inventory levels were so low they felt like if they didn’t aggressively go after things, there may not be something around the corner.”

STILL ON THE FENCE

Jon Siebers, a partner and M&A attorney at Rhoades McKee PC in Grand Rapids, said he’s been “very busy” since the fourth quarter of 2016 and expects the market to stay strong through 2017. While he’s not seen the “tidal wave effect” from baby boomers retiring, he is working on more transactions today where owners are passing a business to the next generation or selling to management, occasionally with the involvement of an outside investor.

Siebers agrees buyers continue to outnumber sellers in the market. 

“There are a lot of sellers on the fence out there,” he said. “I’ve seen very good, credible, financeable buyers out there that are having a hard time finding good businesses.”

Siebers, who works in the lower middle market, suspects the sound U.S. economy has led some business owners to hold off on selling.

“Business is good, so they’re making good money and they don’t necessarily feel pressure at this point to sell,” he said. “They fell like, ‘Well, if I can keep taking home what I’m taking home right now for another year or so, why not hold off on selling for another year or so?’”

That approach comes with risk for a business owner who wants to sell in the future. If the economy were to weaken or begin to slow, some buyers may leave the market, making it harder to sell, Siebers said.

An economic downturn could also bring more businesses to the market, according to Siebers. He believes any signs of a weakening economy could prompt more owners who have been considering a sale to finally act.

“If the economy starts to slide, part of me thinks that’s going to knock certain sellers off the fence because they’re going to say, ‘Here we go again. I don’t want to ride another recession like I did the last one and I don’t want to be stuck owning my company for another 10 years,’” he said.

TRUMP BUMP WEAKENS?

At Calder Capital LLC in Grand Rapids, Managing Partner Max Friar feels that sellers have pulled back from the market compared to a year ago. More sellers “were coming out of the woodwork” in the second quarter of 2016 than this year, he said.

However, buyers still outstrip sellers, driving strong competition for good deals, Friar said.

“I’m eager for more sellers to come out of the woodwork,” he said. “It’s a fantastic time to sell if you’re a seller and a frustrating time if you’re a buyer.”

One area that’s slower than a year ago is the manufacturing sector, Friar said. Flat sales to start the year may have kept some small manufacturers off the market. Likewise, others could have held off given the promise of corporate tax reform and infrastructure spending early in the administration of President Donald Trump.

As federal tax reform and an infrastructure package appear delayed until late 2017 or 2018, sellers who held off in the first part of the year may finally come to market in the third quarter, according to Friar. 

“Maybe reality will start settling in in terms of the Trump agenda really not playing out,” he said.

MORE OF THE SAME

While M&A activity remains strong, auctions for companies for sale are not as “ heated” among prospective buyers as they were a year ago, said attorney Peter Roth, a partner at the Grand Rapids-based Varnum LLP who works in the middle market, typically on transactions valued at $20 million to $200 million. 

Valuations are coming off their highs and “bidders aren’t bidding crazy numbers.”

“I don’t see quite the heated auctions as much,” said Roth, who expects the M&A market to stay “about the way it is” in the market in which he works. “I don’t think it’s going to get much better, but I don’t think it’s going away.”

Read 1383 times Last modified on Sunday, 11 June 2017 20:07
Mark Sanchez

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