A continued robust economy provides the right timing for business owners to consider selling their companies throughout the remainder of the year.
That’s according to business brokers and advisers in West Michigan and across the state who cite the availability of credit from banks, low interest rates and high consumer optimism as fueling an ideal market for a transition event.
In separate interviews, MiBiz spoke with four industry professionals to get their takes on the market for business transitions and succession planning, as well as their outlook for M&A this year. They included:
- Max Friar, managing partner at Calder Capital LLC, a Grand Rapids-based M&A firm
- Gary Lewis, managing director at Cascade Partners LLC, a Southfield-based investment banking firm
- Randy Rua, principal of Rua Associates LLC, a Zeeland-based M&A firm
- Eric Siefert, founder of Left Coast Capital LLC, a recently launched Muskegon-based firm that works with small businesses on exit planning and securing capital or credit
Here are some highlights from what they had to say.
How has the federal tax reform law affected deals? Is it slowing them down, speeding them up, or pushing people into the market that normally wouldn’t be ready to sell?
Friar: No one has called me up and said, ‘Hey, because of tax reform, I want to buy a business,’ or ‘I have decided to sell my business.’ However, there’s been more activity this quarter in terms of interest from sellers than I have had in the past two years, and I do think that tax reform is part of that. … It’s not ambiguous anymore. People understand what the tax reform is, and they can now feel comfortable making a decision at least knowing what the math is versus not.
Lewis: It’s very interesting. Overall, our practice and business has been strong and optimistic in 2018. The overall economic optimism is, I think, playing a role in this. You have large corporate and large strategic organizations that are looking at modest growth and potentially looking at accelerating that growth through strategic acquisition. They have cleaner balance sheets than they had several years ago (and) credit is widely available. You have a variety of family offices and private equity firms that are continuing to grow in number in terms of prospective buyers (who can) prudently deploy capital in an accelerated matter. At 10,000 feet, you are seeing a very strong deal environment, and some of that is attributable to the tax reform.
Seifert: I am not seeing much. I’ve only closed one deal, but have a number (of deals) pending. The large corporations passed down the tax savings to the employees, which is maybe relieving some of the pricing pressure on wages. … Some of the aging baby boomers are trying to get out sooner than later. I had a few clients who had three- to five-year plans to get out and pivoted to go out now (because) the timing seems to be right.
Rua: A few of the transactions we have been involved with that have a C-Corporation, where they are going to have to pay a corporate tax, were excited about the tax law change, so they can lower their tax burdens. They’ve decided to sell this year, unless they are waiting for some of the changes in their businesses to occur. But they are going to try and capture this new tax law change while they can.
How is the current economic situation affecting deal flow?
Friar: I think you continue to have a market where private equity and family offices and strategic buyers have cash, have liquidity, have their banks calling and saying, ‘Please, can we lend you money for anything?’ The typical Calder sell-side prospects and sell-side clients are industrial, distribution and manufacturing. We kind of aim at companies with $500,000 in cash flow or more. … I think there are a lot buyers out there that want to do deals, but there is a sense that (sellers) might sit back and enjoy the profits.
Lewis: We are seeing an incredible amount of activity. … We are busy across the board. It’s not leaning one specific direction. I think a lot of folks were a little bit hesitant last year in the fourth quarter trying to understand exactly what was happening with the potential tax reform. No matter what side of the fence you are showing up on, I think there’s more certainty than there was in the latter part of last year, and I think people are acting on that now.
Seifert: A strong economy and its strong earnings (are) providing capital to fuel acquisitions. There are a lot of strategic buyers out there. They are looking to expand their product sets, and sometimes their geography. The new thing that is popping up is this phenomenon called ‘acquihire’ — acquisitions to hire people. Some industries like advanced machining and tool and die and whatnot, they just can’t find skilled workers, so they are looking to buy an underperforming company just to get their people. The normal valuation tools with multiples and whatnot are thrown out the window because some of these larger shops, they’ve got the business, they just can’t get it out the door because they can’t hire the people.
Rua: The tax change, that’s accelerating it from buyers wanting to take advantage of lower taxes after they acquire. On the economics side, we are seeing that buyers are pretty optimistic right now. For the last several years, there was still kind of a leftover concern from 2009, and I haven’t heard anyone mention that in at least the last year. … (People) are pretty focused on the future and pretty positive about it. That’s obviously impacting business sales, and there are more buyers right now than there are sellers.
What role could higher interest rates play in cooling deal flow? Do higher rates change how deals get financed?
Friar: We’ve actually seen over the past couple of quarters that multiples are being compressed a little bit. I don’t want to set off any alarm bells, because if you look at small multiples over the last decade, they really don’t fluctuate that much. … There’s been a little bit of a compression, a little bit of a downturn in multiples, but overall it’s been very consistent for years. I would directly tie that to interest rates rising. … We are in a very interesting time where rates are rising, and sellers are still feeling good because of the economy.
Lewis: Potentially, when you take it in connection with the interest cost and tax reduction. Generally, higher interest rates will start to shift either the way businesses are financed or it’ll have an inhibitor effect on M&A activity in general. Credit is very available today, not shockingly. At the end of the day, if you are still seeing a robust economy that is optimistic in nature, I think people are stretching to make really strong strategic fits. … Interest rates are still historically low, and you will have to see a more dramatic rise in order to have a material impact on valuation and the actual number of deals done.
Seifert: It’s all relative. When I was working with the bank, they always rate (test) a deal to see if it would sustain an increase of 2, 3, 4 percent. The savvy business acquirers are doing the same thing. … If you look back over 20 years, intuitively a good interest rate is like 9 percent. When I am looking at valuing a company, I look at boosting the interest rate to 9 and 10 percent, and if a deal can’t survive that, then you have to look at more capital or some other mix. We’ve been spoiled for a long time with super low interest rates.
Rua: If interest rates go up, it’s going to cost the buyers more as the cost of capital increases. There may be a little discount of valuation for that, but because the demand is so high, I don’t expect a lot of that. I don’t think it’ll impact value until the demand for businesses slows down from buyers, and then buyers would probably have the leverage to reduce the valuations for companies based on the higher interest rates involved. For the short term, I don’t see that affecting anything.
What are some emerging trends you’re seeing now that maybe you didn’t notice a year or two ago?
Friar: I thought that there would be more sellers at this point. If you would have asked me a few years ago, I thought the market would be more balanced. Because the economy is growing back, many business owners are doing well … and this idea of retiring for the traditional small business owner doesn’t sit well with them. They like to work, and they enjoy entrepreneurship, and they enjoy control and the independence. … Truthfully, there continues to be a lot of buyers that are chasing a few small deals out there.
Lewis: There’s been so much acquisition liquidity created over the last decade that you are seeing way more family offices pop up and become meaningful competition to private equity and strategic buyers. (Family offices) tend to create wealth from (owning and) operating companies. They are not held to specific deal structures or specific timelines. The family office approach can really resonate with a specific buyer in how they approach businesses, their general flexibility and many times they are able to bring in a unique angle to the table, whether that’s relationships or otherwise.
Seifert: An increased pace for automation in virtually every sector. It’s outpacing what I think anyone foresaw a couple of years ago. … The virtual marketplace is hot. You can establish a business and grow it without having any brick and mortar. I have worked with some really successful entrepreneurs that have put together little niche businesses and market through Amazon or directly through websites or social media. It’s a great way to do a cottage industry in a new format.
Rua: Over 10 years ago when I was selling companies, most buyers and banks looked at a five-year history of a business. They would use that five-year history to kind of judge the business value and also how much to loan. That was kind of interesting. After 2009, everyone started doing a three-year look because you couldn’t really include the bad years because it skewed things. … Most recently, it’s been weighted to the last year and to what the next year looks like.