Published in Economic Development

Time to Act? Advisers tell clients to accelerate transaction timelines to take advantage of strong valuations

BY Saturday, October 13, 2018 05:55pm

Mergers and acquisition activity remained strong in West Michigan through the third quarter, as many sellers opted to go to market while they can still get a good price for their businesses.

Professionals in the M&A industry describe a clear seller’s market in which clients exiting their businesses often receive multiple offers from prospective buyers. Private equity firms and family offices remain active, competing hard for good deals, which is keeping valuation multiples up.

(Clockwise from top left): Mike Teeter, Invictus LLC; Jon Siebers, Rhoades McKee PC; Randy Rua, NuVescor Group LLC; and John Kerschen, Charter Capital Partners. COURTESY PHOTOS

“It’s a great time for the sellers,” said Mike Teeter, managing partner at Invictus LLC, an M&A firm in Spring Lake.

Teeter’s advice for business owners considering an exit in the years ahead: Act now while the market is still good.

He cites a client that has worked with Invictus to position the business for an eventual sale. The owners are in their late 50s and want to sell within three to five years.

“I have to look at them and say, ‘You need to look at it now because of where we are from a multiple standpoint,’” Teeter said. “If you’re a seller right now and your numbers are good and you have a team in place, that’s attractive.”

At Grand Rapids law firm Rhoades McKee PC, M&A attorney Jon Siebers reports deal activity that “is crazy right now.”

“I don’t see any slowdown between now and the end of the year. I’ve got a ton of stuff going on,” said Siebers, noting that private equity buyers are increasingly active in the West Michigan market.

“You talk to business owners and if they’re above a certain revenue range and they’re in a certain industry, they’re getting calls weekly from private equity firms looking to come and talk to them. That activity is still hot right now,” Siebers said. “I don’t know if that’s going to slow down in 2019 or not.”

There’s even “a ton of activity as well” for companies that “are below what you would normally expect to attract PE attention,” Siebers said.

DRY POWDER

John Kerschen, president and managing partner of Charter Capital Partners, a Grand Rapids-based M&A firm that typically works in the lower middle market, attributes the private equity activity this year to the massive amount of “dry powder” in the U.S.

American private equity firms entered the year with a record $353 billion in dry powder, up 44 percent from 12 months earlier, according to an August report by the Washington, D.C.-based American Investment Council.

As private equity firms face deadlines to deploy their available capital, they’ve become increasingly active and competitive for deals, driving up multiples, Kerschen said.

“They have so much money and they have to get it deployed, so they’re willing to pay up,” he said. “There’s a sense of urgency to get transactions done.”

That makes for a strong M&A market, Kerschen said. He’s been involved in M&A for 22 years and the present pipeline of deals for Charter Capital Partners “is as good as we’ve ever had.”

“We’re as busy as we’ve ever been and they’re good quality projects,” he said. “We’re enjoying this cycle.”

As well, Kerschen advises business owners looking at a future exit to consider accelerating their plans before activity tapers off and multiples come down accordingly.

“We’re closer to the end of the positive cycle than we are to the start of it,” he said. “This environment is good enough to look at it now rather than later if you are at all thinking about it.”

Many sellers today are doing exactly that and putting their businesses up for sale when they can take advantage of a strong market and get top dollar, M&A experts say.

Randy Rua, managing partner at Grand Rapids-based NuVescor Group LLC that generally works with small businesses at the lower end of the middle market, said some sellers saw the strength in the market in 2017 and decided to make a move this year.

“That’s why we’re so busy: A lot of people that are in our pipeline kind of realize that they don’t want to miss out and have the market turn and miss the opportunity,” said Rua, who also encourages owners not to wait if they’re considering an exit in the next year or two.

“To wait one year, it’s too much risk to lose out if something changes in the market,” he said. “Getting proposals on businesses is not an issue. It’s more how high of a proposal you can get in this market.”

EASING AHEAD?

Rua and others raise questions about the current cycle and how long the current period of U.S. economic growth will continue.

Rua has represented some sellers this year whose “numbers have all slowed down.” He’s unsure if that’s an emerging trend and an early signal of what’s to happen in the economy, or just a reflection of the unique circumstances in those particular businesses.

“We hear positive things in the market, but these numbers we’re getting are all declining in sales and increasing expenses. That’s what we’ve seen pretty consistently across several companies we recently worked with,” Rua said. “That’s giving us pause to say, ‘Is this just coincidence or is there something going on?’”

A couple of recent outlooks do see growth easing for the U.S. economy next year and beyond.

Comerica Inc. projects real gross domestic product growth to come in at 2.7 percent and 3.4 percent for the third and fourth quarters, respectively, after hitting 4.2 percent in the second quarter of this year.

Real GDP growth will ease to 2.5 percent to start 2019, then slow throughout the year to 2.1 percent by the fourth quarter, according to the latest outlook Comerica issued last week.

Despite the slower projected growth rates, the present U.S. economic expansion that’s in its 122th month “is in no immediate danger of ending,” Comerica Chief Economist Robert Dye wrote in his October update.

Economists at the University of Michigan, in an updated outlook this month, predict Real GDP growth of 2.9 percent for all of 2018, followed by 2.8-percent growth in 2019 and 2 percent in 2020.

‘RIDE THAT WAVE’

Even if the economy slows, Siebers at Rhoades McKee doubts it will generate an exact corresponding decline in M&A activity. Some buyers are waiting for a slowdown to happen because it will bring down multiples, allowing them to get a better deal.

“Right now, I’m not so worried about when the faucet is going to turn off. I don’t think it’s going to turn off; I think it’s going to slow down,” Siebers said. “The interesting thing is, I have a number of clients who have come to me and said, ‘I have a company I’m looking at or a business plan that includes acquisitions, but I’m waiting for the slowdown, because I don’t want to pay the multiples we’re seeing today.’

“Those multiples are going to come down and the companies are still going to be very good companies. I think there are a lot of buyers that are saying, ‘I’m not going to get caught up in the craze right now. I’m going to wait until things slow down and other buyers are then sitting on the sidelines. That’s when I’m going to get into the game.’

“If that’s the case, M&A activity may not dip as much as you would expect when the economy starts to slow.”

Teeter at Invictus believes the M&A market could see an “adjustment” in the next two to three years. He views the present market as having plateaued.

“We’re going to ride that wave for a while,” Teeter said. “(In) two, three years, we’re going to see business continue to do well.”

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