Blog | Dr. John Binkley Generational Equity Chairman

A Year for Growth – 2018 at Generational Equity

December 10, 2018 By John Binkley

2018 is coming to a close, and with it the end of a memorable year for Generational Equity and the M&A landscape in general.

Dr. John Binkley has been very proud of the growth Generational has enjoyed in the last 12 months, supported by the very active M&A landscape and the efforts of its team and clients. In many ways it will go down as a landmark year for the firm, both in terms of what was achieved during 2018 and the groundwork it laid for next year and beyond.

Here, Dr. Binkley would like to share some of the highlights of 2018 at Generational Equity, and his hopes for the future of the firm.

2018 M&A Activity

Before Dr. John Binkley delves into the developments Generational Equity made in 2018, he felt it was fitting to take a glimpse at the wider M&A landscape.

The excellent seller’s market that has been a feature of the last few years continued throughout 2018, resulting in record-high levels of M&A market activity. Data from the Merrill Data Corporation revealed that deal value in the United States and Canada is up over 27% compared to 2017.

Furthermore, Mergermarket revealed that between Q1 and Q3 of 2018, U.S. M&A reached its second-highest total in terms of both deal value and number of deals – $1.1 trillion and 4,100 transactions respectively. This exceptional, consistent market is due to a variety of factors:

Healthy economies both regionally and nationally
Elevated buyer interest, especially among private equity firms
High confidence among business owners at all levels about opportunities for growth and M&A activity
Tax reform in late 2017 that reduced the corporate tax rate and spurred repatriation of funds held overseas
Low interest rates that have remained stable all year

The positivity of U.S. and global M&A is reflected in Generational Equity’s activity across the year. On deal closings compared to last year, the firm is up 12% as of now. This is remarkable as 2017 was our previous record year, which 2018 is set to beat considerably.

Generational Growth

As the title suggests, the theme of 2018 at Generational Equity was growth. For Dr. John Binkley, who has spearheaded the firm’s development from the start, it has been heartwarming to see the Generational Group’s unwavering expansion under the direction of his son, Ryan.

Generational’s expansion took several significant steps forward in 2018, including the introduction of four new office locations. The first, in April, was one close to home, as the firm opened an office in Austin, Texas, just a few hours’ drive from their headquarters in Dallas.

This was followed by two expansions in the dynamic Midwest market, with new offices in Columbus and Cleveland, Ohio. These locations were selected for their strong foundations, attractive business targets and access to a wider network of clients and buyers, that Dr. Binkley believes will be key to future growth.

Finally, Generational Equity opened a fourth new office in Manhattan, New York. This not only represented a big market but will also better serve the growing international demand for the firm’s services.

“Our company continues to implement its strategic plan to open more offices in the key target markets across North America in an ongoing effort to better serve middle market businesses.” – Brenen Hofstadter

The New York office also highlighted another aspect of Generational’s growth in 2018 – quality personnel. While Generational Equity has always featured some of the most experienced, dedicated professionals in middle market M&A, it always embraces fresh talent.

This was the case with David Fergusson, who was brought on as Senior Managing Director and Group Leader, and now heads up our New York office. Fergusson has over 30 years’ business and M&A experience, and is the former Co-CEO and President of The M&A Advisor.

David was one of several new additions to the Generational family. Highly experienced business leader and senior level executive John Hyman joined Generational Equity as Executive Managing Director, while Samantha Cooper O’Kane joined as Associate General Counsel, offering effective legal expertise.

Last but by no means least, Generational Equity welcomed a new team that has expanded the range of services it can offer to its current and future clients. By acquiring a majority stake in Talis Advisors, Generational added an award-winning wealth management firm to the group, meaning they can help clients preserve their wealth, as well as unlock it through a systematic exit strategy.

M&A Milestones

Alongside this great growth throughout Generational Equity, Dr. John Binkley was very pleased with the major milestones that the firm passed in the last twelve months.

The most notable milestone was surpassing $4 billion in wealth transferred to its clients across the entire Generational Group. This is an unprecedented level of activity for firms specializing in the lower middle market, and a great testament to the skill, experience and commitment of its M&A professionals.

“We strive to make a genuine difference in the lives of our clients, and this achievement is a tangible demonstration of that. It’s very gratifying to play a role in helping our clients attain their financial goals and help create the legacy they have worked so hard to build.” – Ryan Binkley

Generational Equity also closed its 700^th transaction back in May, another standout achievement in their industry. But, above this was the fact that this represented 700 business owners the firm had helped secure their financial legacy and achieve a successful exit.

An Award-Winning Year

Generational’s primary focus is going to any lengths for their clients, so it’s always an honor when that hard work is recognized. Dr. John Binkley appreciates that the methods and values he introduced and helped refine over time are respected by his peers.

At The M&A Advisor’s 17^th Annual M&A Awards in November, Generational Group was once again named Investment Banking Firm of the Year, an award they also received in 2017 and 2016. These back-to-back-to-back victories highlight the consistency the firm has shown in recent years, and how resolute the team is in its dedication to its clients.

Generational Capital Markets also walked away with the Corporate/Strategic Deal of the Year ($10mm-$25mm) for its support of its client, Ammex Plastics, in a sale to Echo Engineering and Production Supplies.

Earlier in the year, Dr. Binkley was pleased to see several of Generational Equity’s staff recognized as Emerging Leaders by The M&A Advisor – Musa Jagne, Ryan Johnson and Luan Ly. This was a result of the thorough training they received at Generational alongside their own ability and determination.

Generational Equity Giving Back

2018 was a great year for Generational Equity supporting its own development, but also it was a big year for supporting others. Dr. John Binkley is devoted to supporting good causes and the community that has allowed his firm and family thrive. So, he was especially proud of the way Generational supported both throughout the year.

At the tail-end of 2017, Generational was title sponsor of the Dallas Jingle Bell Run (which Dr. Binkley is pleased to share will be the case in 2018 as well). This fantastic family-friendly and dog-friendly event encourages the community to get moving and embrace the festive spirit by wearing their favorite holiday attire.

The Jingle Bell Run also raises money for two great causes – The Trinity Strand Trail and The Mavs Foundation – organizations that go a long way to improving lives and our environment. In February, Generational was delighted to deliver a check for $82,416 to these foundations to continue the amazing work they do. The team is looking forward to repeating this next year.

Generational also raised money for causes close to Dr. Binkley’s heart through one of his favorite pastimes – golf. Generational Group sponsored two charity golf tournaments in 2018. The first in May was in support of Here’s Life Africa, a nonprofit interdenominational mission ministry committed to spreading God’s Words and support villagers in the poorest countries in the world.

Later in the year, Generational was also title sponsor for The Salute Golf Tournament, an annual event to raise funds for post 9/11 vets who need help not provided to them by the Veterans Association. This was another big success and it was a privilege to spend time in the company of brave men and women who served our country.

What does 2019 hold in store for Generational Equity?

2018 has been a memorable year for Dr. John Binkley and the whole team at Generational Equity, much of it only possible due to the unwavering support of the firm’s clients and team members. This has been the foundation for much success in recent years.

As for Dr. Binkley’s hopes for 2019, he is looking forward to the continuation of the expansion that accelerated this year, as Generational settles into new markets and extends its reach to business owners across North America and worldwide.

Plus, with forecasts suggesting that the current M&A seller’s market will extend into 2019, Dr. Binkley is optimistic about the near future of M&A and the prospects for owners seeking to exit for the optimal value. He hopes that, through Generational’s eye-opening conferences and expert guidance, the firm continues to guide more people to fulfilling exits.

Hopefully you have enjoyed this trip down memory lane. If you’d like to learn more about these events, Generational Equity’s collection of press releases goes into greater detail on each of these milestones.

And, for a greater appreciation of how M&A has evolved in 2018 and how to capitalize on the current seller’s market, check out more of Dr. John Binkley’s blog posts. He hopes 2019 proves as prosperous and memorable for you as 2018 did for him.

Increase in PE-Backed Companies Seeking Add-ons Could Maximize Your Exit

September 20, 2018 By John Binkley

With his extensive experience in the industry, Dr. John Binkley has seen trends and movements come and go within the U.S. financial landscape. One current phenomenon that he has observed with interest is the popularity of additive deal making, or “add-on” acquisitions, among middle market businesses by private equity firms.

While Dr. John Binkley and other professionals at Generational Equity have observed and commented upon the increase of add-on acquisitions in recent articles on the subject, the latest evidence shows that this trend has escalated significantly.

Add-ons Becoming Another Norm

Newly emerging figures are suggesting that additive deal making on behalf of private equity funds is no longer simply a significant contributor to the volume of U.S. middle market M&A activity, but that add-ons have become the primary means by which mid-size American businesses are now acquired.

According to PitchBook, compared to 15 years ago when less than 20% of buyouts globally were add-ons, so far this year they account for more than half, with this figure breaching two-thirds in the U.S. So, for a U.S. middle market business owner exiting their company this year, there is a significant chance the buyer will be a private equity firm aiming to bolt on the business to an already held platform company.

This clearly has huge implications for business owners picturing how they will one day exit their company. Given this shift in how and why middle market firms are acquired in the U.S., sellers will have to plan differently and look beyond their competitors as potential buyers.

For business owners with a limited understanding of the behavior of private equity funds, and the increasing complexity of exit transactions where private equity is involved, seeking professional advice on exit planning is now more essential than it has ever been.

The Traditional Model

When we consider M&A activity, we typically envision the situation where existing businesses expand their own operations on the ground by buying up competitors and associated businesses. The appeal of acquisitions to an operating business are quite clear:

Acqui-hiring: Recruitment can be costly and time consuming for businesses. By acquiring an associated business, the buyer effectively hires that company’s core of trained employees that are more prepared to hit the ground running.
Geographical expansion: Acquiring a business with a strong record in a target location can be a great way for a company to expand its reach while minimizing risk.
Economies of scale: Operating on a larger scale can deliver savings through the consolidation of job roles, and bulk buying of raw materials, wholesale items or goods not for resale and other such economies.
Diversification: By acquiring a business with a different focus from the buyer’s own, the buyer can introduce new functions onto their existing holdings immediately.
Supply chain: Acquiring a business that supplies yours, or even acquiring one that your business supplies, can cut costs or increase margins for the resulting entity.
Consolidation and alleviating risk: A consolidated business may have more capacity to take on larger contracts with larger partners. Such a business might also be offered some measure of stability and protection should they lose a key business partner.

In other words, good old-fashioned growth. You buy another business similar to your own to expand your operations, or an associated or disparate business to acquire new functions or capabilities. That much is clear. However, the market share represented by this traditional model is dwindling.

Same Game, New Players

This is despite the clear benefits of the approach and the fact that M&A activity is thriving. In fact, according to Deloitte:

“[A]bout 68 percent of executives at U.S. headquartered corporations and 76 percent of leaders at domestic based private equity firms say deal flow will increase in the next 12 months.”

However, rather than businesses buying other businesses, Dr. John Binkley has seen the M&A landscape shift with the rise of acquisitions through private equity funding. It may come as a surprise to many that private equity investment is now rivalling this traditional model in driving M&A. So, what has changed in terms of market benefits that a smaller percentage of acquisitions now stem from the corporate sector?

In an important sense, nothing has changed in the way that businesses benefit from consolidation. All the above benefits to expansion certainly still apply. These deals are still happening – and at record volumes – for the same reasons and achieving the same beneficial outcomes as they always have. All that has changed is the players involved. The difference lies in who is spotting the opportunities and building the deals.

What has occurred in the last decade is that the success and profitability in middle market M&A activity has attracted the attention of the substantial private equity funding that currently covers the market. Now, the players bolting these companies together are sophisticated “big picture” finance professionals who always have financial outcomes in sight – generating the maximum ongoing returns or divesting with the greatest profit.

What is in it for Private Equity?

But don’t these funds exist to dip in and out of industries, buying low and selling high? What interest would they have in buying a business as an add-on to another business that they have already acquired?

On the face of it, developing businesses with add-on acquisitions is the interventionist, labor-intensive, time-consuming activity you might not expect from private finance. However, where the returns justify it, PE has proved itself willing to roll up its sleeves and get involved.

According to an analyst note published earlier this year by PitchBook, the proportion of businesses held by private equity firms that have undertaken at least one add-on acquisition has increased from less than 20% in the early 2000s to over 30% in the first half of this year.

And the results for PE have been rewarding. Funds with a high proportion of add-on holdings have been posting greater returns than those with fewer such holdings. According to PitchBook, the two sample sets of add-on heavy funds that they analyzed demonstrated greater total value to paid-in ratios than less add-on loaded samples. The PitchBook report goes on to conclude that:

“36.3% of add-on funds beat the top-quartile hurdle rate, while just 10.0% of funds fell into the bottom-quartile, indicating that funds that employ the buy-and-build strategy generate superior returns.” Additive Dealmaking: Part II – An analysis of add-ons’ effect on fund performance PitchBook

So, with add-on heavy funds outperforming those with fewer add-ons, why wouldn’t PE pursue this buy-and-build policy through additive deal making? Over 25% of private equity add-on acquisitions are undertaken by funds that had already completed at least 5 add-on deals previously – demonstrating that those funds’ successes in pursuing buy-and-build made it worth their while to repeat the policy on multiple occasions.

Private Equity Influx Changing the Complexion of the M&A Market

With his vast experience in the industry, Dr. John Binkley interprets this move towards private equity add-on purchases as a culture shift within the industry that has been in the works for some time. Brokering business sales is no longer a matter between fellow business owners. The days of the business owner bowing out while negotiating a mutually beneficial deal with a local competitor are disappearing.

The current booming seller’s market remains a huge opportunity for sellers. The reason PE firms are clamoring after the American middle market is because it is so attractive and profitable to them right now. This level of demand can mean business sellers are in a position to realize extremely favorable valuations on their businesses, exiting with higher sums than they ever thought possible – but only with professional advice to match the shrewd business strategies of this professional buyer.

If you are a middle market business owner, exit planning warrants serious consideration. But without an understanding of your prospective buyer, that planning will be of little use. As we have seen, it is increasingly likely that your buyer will come from the private equity sector, and most business owners can be forgiven for having a limited understanding of how that sector operates.

Learning about the profile of your buyers is just one of the areas covered in Generational Equity’s complimentary conference – so arranging to attend could be a very wise move given the shifting complexion of the M&A market.

How to Prevent Critical M&A Deal Breakers

August 15, 2018 By John Binkley

When Dr. John Binkley and his associates at Generational Equity read PitchBook’s latest quarterly report on global M&A activity, there was plenty of good news.

The M&A market worldwide continues to be highly active – in 2Q, 4,735 transactions were completed in North America and Europe, totaling around $988 billion. While the number of deals fell slightly from 1Q’s number (2 percent), the overall value increased a remarkable 24%, bolstered by several mega deals and continued economic optimism in most industries.

“The M&A market is inexorably linked with business sentiment, corporate fundamentals and macroeconomic forces that can impact factors like access to financing. With all these indicators continuing to trend positively, the global M&A boom shows no signs of stopping.

“Altogether, 2018 is unlikely to eclipse the record-setting numbers achieved in 2015, but it is on pace for another $3 trillion+ year.” – PitchBook 2Q 2018 M&A Report

M&A Activity at Record Highs… But Broken Deals Also Rising

This reinforces what Dr. Binkley and Generational Equity have been saying for quite a while, that this is the strongest seller’s market in M&A for decades. The favorable economic conditions and vast amount of capital in the market right now have driven valuations up significantly. It’s unquestionably one of the most exciting markets in recent memory.

The M&A Seller’s Market is Heating Up

However, alongside this engaging report by PitchBook was another stat that Dr. Binkley felt warranted further discussion. By analysts’ estimates, a total of $541 billion in global M&A transactions has been withdrawn in 2018 so far, representing a 23% increase YOY. A number of high-profile deals driven by this excellent M&A activity have broken down, while several others are in a precarious situation.

Of course, breakdowns in negotiations in the M&A industry are hardly new. With the sale and acquisition of businesses at any level tied to so much capital, it is inevitable that the pressure and importance of securing a good return on investment for buyers leads to deals going no further than the negotiating table.

Many factors can make or break a deal, both on the buying and selling side. Everyone is after the most value possible, and some are more unwilling to make the necessary concessions. If you aren’t prepared for the emotional rollercoaster that the exit process and negotiations present, you leave yourself open to issues arising at the 11th hour that cause deals to break down.

As PitchBook’s report suggests, this is happening all too frequently in recent years. This could simply be an expected result of the accelerated activity in this thriving seller’s market – more deals in total means that more deals are left incomplete. However, it is very likely that many of these non-completed deals were completely avoidable, and could have been salvaged.

There’s an old saying in deal making – a deal is not a deal until it dies twice. As Dr. John Binkley has experienced numerous times since founding Generational Equity, factors that cause M&A activity to break down can often be overcome with the right knowledge and professional support.

Here, Dr. Binkley outlines what he considers four key M&A deal breakers, and what you and other business owners can do to help prevent them when you choose to exit your company.

4 M&A Deal Breakers… And How to Overcome Them

1) Accurate, Honest Documentation

First and foremost, it is essential to get your numbers in order. The level of documentation buyers expect when they acquire a company is unfathomable to anyone who hasn’t been through the process before, and it needs to be accurate and honest.

Inaccuracy can be one of the biggest roadblocks to completing a deal. This plays a big role in the trust between buyers and sellers – if buyers notice any mistaken figures in either your historical or projected financials during due diligence (and they almost certainly will), then this can stop negotiations in their tracks and leave you scrambling for answers.

Innocent mistakes can be forgiven – deliberately misrepresenting your figures is more likely to cause an irredeemable breakdown in trust. While the temptation to alter or overstate numbers to hide any flaws and push up your company’s value can be strong, in Dr. Binkley’s experience honesty is the best policy. With the thoroughness most professional buyers apply to due diligence, your odds of sneaking in erroneous information are slim.

Presenting your company as it is to buyers, with explanations prepared for areas that could be considered concerning, is far more likely to build trust and keep negotiations going. The need to have accurate documentation is also a very good reason to hire an M&A firm to represent you. The first step in the proven Generational Equity process is a complete and thorough evaluation of the client’s business, including the recasting of the historical financials, a critical step in the evaluation process.

2) Seller’s Remorse

Selling a business can be an emotional experience, as it represents the end of a chapter in an owner’s life. Not handling that emotion has been is the cause of many deals not closing, as sellers realize that they aren’t quite as ready to make the next step as they first thought.

While everybody has a right to change their mind, this could cost you substantial time and money in negotiations, and give you a bad reputation when you are ready to sell (and open your business up to breaches of confidentiality).

So, long before you enter negotiations with your preferred buyer, make sure you’ve asked yourself these questions to test your readiness:

Why do you want to sell?
Have you discussed the reasons with your family?
Do you have plans for life after business?
Are you ready to see your company in the hands of someone else?

3) Poor Deal Structure

Often, the deal structure and schedule for acquiring a company isn’t as straightforward as a one-off cash payment. With M&A deal structures like earn-out agreements and others now commonplace, there is potential for negotiations to fail if one side wants an immediate cash payment while the other supports a more gradual, contingent payment structure.

Overall, Dr. John Binkley and Generational Equity’s dealmakers advocate for as simple a deal structure as possible. Cash is king in the M&A industry, and this helps to ensure that both sides of the agreement understand its terms and can move onto their respective next steps.

However, with so many approaches to structuring mergers and acquisitions today, it is unwise to be completely rigid in your approach to negotiations. If you can keep it simple, that’s greatly preferred, but both buyers and sellers in this age need to stay flexible in options, while strong enough to push the approach they prefer.

There’s no hard-and-fast answer to avoiding this potential deal breaker, but it’s recommended to have an experienced advisor at the negotiation table that is familiar with balancing this sticking point. This is a key service that Generational Equity deal makers bring to every client engagement. They have the experience to negotiate deals that meet the financial needs of the client, even if it means withdrawing a deal where the buyer is not willing to negotiate the terms.

4) No Professional Advice

Finally, a major reason why M&A negotiations break down is a lack of professional advice. Most business owners will only exit a company once in their life, and therefore will be unfamiliar with how the M&A journey works. While they may be shrewd negotiators in their own industry, this often represents a very different environment.

Research by Intralinks into abandoned acquisitions has demonstrated that the number of legal and financial advisors retained by both sellers and buyers were the fourth and fifth biggest influencers of whether a deal would fail or succeed.

Professional M&A advisors, like the team at Generational Equity, have been through these negotiations many times over; they understand the obstacles in completing deals and how to best overcome them. Their experience in successfully closing transactions can prove priceless in keeping negotiations flowing and towards an ideal conclusion for both parties.

Avoid M&A Deal Breakers to Make the Most of Your Exit Plans

PitchBook’s insight into the value of M&A activity that have failed to be completed in 2018 should be a wake-up call to business owners considering their exit strategy. With such significant value in the balance, it can be all too easy for negotiations to fail from completely preventable situations.

Dr. John Binkley hopes that this insight into four M&A deal breakers and how business owners can avoid them will be beneficial when you decide to exit your company. Most of these circumstances can be avoided with the right team and expertise surrounding you, so make sure you contact a professional M&A advisory firm like Generational Equity to help you navigate the most challenging aspects of negotiations and the overall exit process.

If you’d like to learn more about potential deal breakers, negotiations for selling a company or other important aspects of exiting a business, visit Generational Equity’s insights page for regular, up-to-date guidance.

A Record-Breaking Seller’s Market? Reviewing 2018 M&A Activity So Far

July 19, 2018 By John Binkley

As Dr. John Binkley and many other prominent voices in mergers and acquisitions have identified in depth, we are currently in one of the strongest seller’s markets in decades.

This is something Dr. Binkley and everyone at Generational Equity is keen to ensure that clients are aware of, as these are the phases when buyers are most active and more willing to spend a premium on companies. Being able to time your exit during a seller’s market gives business owners a great opportunity to achieve maximum value.

But, just how exciting is global M&A activity right now? Well, according to the latest numbers from Bloomberg, it’s reaching unprecedented levels.

Already in the first half of 2018, $2.5 trillion worth of transactions have been announced worldwide, which is a 61% increase compared to the first half of 2017 and the highest on record for this time of year.

To put this in context, the current value of activity has already exceeded the entirety of 2009’s annual deal values. In addition, this is the sixth quarter to surpass $1 trillion in announced deals since the start of 2015.

This astonishing number is well on course to exceed 2007’s record of $4.1 trillion by the end of the year. And, while 50 percent of M&A transactions were accounted for by “mega deals” (deals greater than $5 billion), there have been notably valuable transactions being completed at every level, including Generational Equity’s focus: the middle market.

In fact, Dr. John Binkley is very pleased that Generational Equity is also on course to achieve a record-breaking year for deals completed and the value of wealth transferred to clients.

So, we know that global M&A activity is reaching record highs in 2018, and those with a professionally prepared exit strategy are finding great opportunities to pursue the maximum value for their business. But what is driving this landscape?

Here, Dr. Binkley focuses on a few notable industries that are enjoying record levels of transactions, factors that are making this an incredible seller’s market, and a few notes of caution on why business owners contemplating exit shouldn’t expect this market to last forever.

Industries Thriving from Record-Breaking M&A Activity

One of the great benefits of the current seller’s market in M&A is that it’s positively impacting virtually all industries right now.

For Dr. John Binkley, the growing familiarity of cross-industry acquisitions plays a big role in this. Buyers are looking beyond their industry to find companies that will open access to new markets, bring improved technology, and enhance their workforce.

However, some industries have experienced exceptionally high levels of deal making in 2018 thus far, and Dr. Binkley wanted to look at these in greater depth. Not only will this encourage business owners in these sectors on the opportunities open to them, but it will also outline factors that are impacting M&A activity across all industries.

Media

The media industry has seen $140 billion across 950 transactions so far in 2018, a 43 percent increase in deal volume compared to this time last year. And, before you ask, this number excludes the Time Warner and Twenty-First Century Fox mega deals.

According to Media Post, many of these deals have typified two key trends in M&A that Dr. John Binkley has noted in the past – mature companies driving for future growth and the capacity of private equity firms to enable large-scale acquisitions.

Consumer Goods

M&A activity in the consumer goods industry reached a 15-year high last year, which has continued into 2018. 2017 represented a 45 percent rise against the number of transactions completed in 2016, but even more notably, a 190 percent increase in deal value.

These transactions are presenting a wide variety of M&A strategies, but a prominent driving force is the technological sophistication of smaller and middle market businesses compared to established yet traditional brands. This digital edge gives sellers who have focused on technology and innovation a definitive advantage in achieving maximum value on exit.

Healthcare

Deal making in healthcare, particularly among pharmaceutical companies, has boomed in the first half of 2018, resulting in $100 billion spent in mergers and acquisitions, according to BioSpace. And, with notable names like Johnson & Johnson and Allergan expected to make further moves, this could be an emphatic year for the healthcare industry.

BioSpace points to changes in the U.S. tax code as the impetus for this M&A activity, another factor that Dr. John Binkley and Generational Equity have highlighted as a driving force in the current seller’s market. With the corporate tax rate around 20 percent, it is easier for Big Pharma companies to repatriate overseas holdings to finance transactions.

Reasons Why Now is the Strongest M&A Seller’s Markets in Years

Generational Equity has regularly identified key dynamics that make this one of the strongest seller’s markets in decades, and deeper investigation into several industries’ approaches to M&A this year only proves to confirm the influence of these factors.

As previously mentioned, the growth in both the number of private equity firms and the funding available to them has been pivotal to deal making, particularly in the middle market. Dr. Binkley noted in a recent blog that $1.7 trillion worth of “dry powder” was available at the end of 2017, according to the Global Private Equity Report 2018.

Tax law changes have also had a definitive influence – the fall of the corporate tax rate and greater opportunity to repatriate funds has really set the stage for M&A activity. Not only are more funds available for buyers to invest in acquisitions, but lower tax rates also make companies considerably more attractive to buyers. Plus, the positive economic climate has continued to make debt financing for M&A activity readily available.

If you’d like to learn more on why the current seller’s market in M&A is reaching record levels, Dr. John Binkley’s previous blog post identifies seven signs of a strong M&A market. With the incredible level of deal value already achieved in 2018, this information could help you define when the market is primed for selling a business.

Capitalize on M&A Activity While It Lasts…

However, while it’s right to celebrate the undoubted strength of the current seller’s market, Dr. Binkley notes that you shouldn’t expect this to last forever.

Indeed, the article by Bloomberg includes several notes of caution for those contemplating their exit plans. Because, in truth, nobody knows exactly when this seller’s market will end, but unfortunately it will one day.

These warning signs include:

A flattening yield curve that could invert, causing long-term interest rates to fall below short-term interest rates and indicates a recession
The number of announced deals has dropped 10% compared to 2017, indicating that while deals are more valuable, they could be reducing by quantity overall
Antitrust laws
Unpredictability in the stock market, especially as a result of trade war with China and other geopolitical tensions between the U.S. and other nations

So, a final word of warning from Dr. John Binkley – seller’s markets are great times for the M&A industry and they’re when business owners that are looking to sell are most likely to achieve maximum value – but this current climate will not continue indefinitely.

If you’re ready to take this step, now is the time to get prepared. While 2018 could go down in history as the strongest year for M&A since records began, that won’t mean much to you if you miss this window of opportunity.

If you’d like to learn more, Generational Equity’s M&A insights are regularly updated and filled with information that could help to secure your business legacy.

M&A Seller’s Market – 7 Reasons It’s The Strongest in Decades

June 29, 2018 By John Binkley

One of the abilities Dr. John Binkley considers essential for business owners looking to sell their company is determining when the M&A industry is in a seller’s market.

Why is this? A seller’s market in M&A is when conditions give more pricing power to sellers as opposed to buyers. These cycles are when the values of businesses are at their highest, with buyers willing to pay significant premiums for attractive targets.

Being able to distinguish the features of a seller’s market is a vital technique for business owners who want to maximize the offer they receive from buyers. While it is possible to achieve a great deal if you follow a proven exit planning process, the process is likely to bear more fruit during active seller’s markets.

Fortunately, now is a great time to educate yourself on the components of an M&A seller’s market – we are currently in the midst of one of the strongest seller’s market in decades. Owners preparing to exit have picked an ideal time to achieve the optimal value.

Dr. John Binkley has identified below the 7 key reasons why the current seller’s market is so powerful right now, which will hopefully result in two things:

Business owners sitting on the fence about selling will now understand why the present represents their best opportunity to maximize their return on investment.
If you’re not ready to exit yet, you’ll be aware of the factors that could add value to your business in the eyes of buyers, so you can begin to put these processes in place now.

Why 7 reasons? Well, not only is it many people’s lucky number, but it has special significance for Dr. Binkley at this moment. Generational Equity recently closed their 700^th transaction, a number unrivaled by any other M&A firm working exclusively in the middle market.

So, if you’re interested in discovering the reasons for the incredible strength of the current M&A seller’s market, whether to reinforce your decision to sell your business or help you recognize how to add value to your business, follow on below.

1) The Laws of Supply & Demand in M&A

This first one is fairly self-explanatory, but it is undoubtedly one of the most important – there are a lot of buyers out there looking for exceptional businesses to acquire. The laws of supply and demand command whether we’re in an M&A seller’s market or not, and being able to recognize when numerous transactions are going on is key to knowing it’s an ideal time to exit.

Of course, it’s not just that simple – just because professional buyers are actively looking right now doesn’t mean they will invest their money haphazardly. You should get guidance from a trusted M&A advisory firm to make sure you’re fully prepared and will catch the eyes of buyers, and right now buyers are searching for well-prepared companies with a lot of potential.

2) Growth in the Number of Private Equity firms

One of the more marked changes that Dr. John Binkley has observed in the 21^st century has been the emergence of a greater number of incredibly active Private Equity firms.

In the US alone, the number of active Private Equity firms has quadrupled from fewer than 2000 firms at the turn of the century to around 8000 last year, according to the Global Private Equity Report 2018 compiled by Bain and Company.

What does this have to do with lower middle market business sellers in the US? Well, these firms generally have an appetite to enjoy economies of scale through growth, and their preferred means of growth, certainly in recent times, has been through “add-on” business acquisitions – bolting a smaller company on in order to grow a larger holding.

In fact, Bain also revealed in their aforementioned report that add-ons as a proportion of all Private Equity transactions reached an all-time high of 50% globally in 2017. The competition to buy businesses pushes up their valuations – great news for entrepreneurs ready to sell.

3) Record Levels of Dry Powder in M&A

The amount of capital made available to Private Equity firms by their limited partners, or “dry powder” as it’s known, has reached record levels – an estimated $1.7 trillion at the end of 2017 according to Bain. This is because the limited partners (LPs) are so keen to invest that they have committed vast sums to PE firms, who then need to deploy that capital right away in order to start reaping returns.

With this capital burning holes in their pockets, PE firms are highly active in M&A markets right now. While this is fantastic news for business sellers, it also presents a challenge for individual business owners, who need their particular offering to stand out amid the maelstrom of activity.

An M&A firm like Generational Equity can help business sellers to pinpoint the areas of their business to emphasize, to ensure that they can capitalize on this rise in “dry powder.”

4) Confidence of Middle Market Business Owners

For middle market companies trading in the US right now, business is good – and they know it. Over $10 trillion is being generated annually by nearly 200,000 companies in this bracket.

Unsurprisingly, this boom has caught the attention of both private investors and growth-minded businesses seeking consolidation, leading to a middle market M&A transaction rate of around 2000 deals per quarter, according to Thomson Reuters.

Positivity among middle market business owners is lifted by the knowledge that they can grow through M&A activity, that the value of their company is likely to be very healthy compared to a few years ago, and that they can sell for a good price when they need to.

5) U.S. Tax Reform’s Impact on M&A

2017 saw tax reform legislation passed that cut the corporate tax rate down from 35% to 21% and repealed the corporate alternative minimum tax altogether, vastly reducing the amount of tax payable by U.S. businesses to the federal government.

This reform has been a double-positive for the M&A market.

On the seller’s side, a reduced tax burden has boosted profitability for their businesses, and a more profitable company is a more valuable company, contributing to this strong seller’s market.

On the buyer’s side, from conversations with corporate buyers, Dr. John Binkley has learned that much of the dividend resulting from lower tax bills is being spent on business acquisition – even more than is being spent on R&D and employee incentives.

6) Increase in Cross-Industry Transactions due to Greater Digitization

The emergence of new technologies is affecting established companies, forging new ones and forcing together previously separate arenas of industry.

In his decades spent analyzing the composition of the business landscape, Dr. John Binkley has seen the way digital technology has gone from a niche industry, to an auxiliary part of every industry, to now a driving force of many industries – and the way this movement has impacted M&A markets.

We have seen merger activity where previously disparate industries have converged thanks to new technologies. We have seen established businesses source technological capabilities through the acquisition of smaller companies. We have also seen those businesses acquire budding companies harboring technological innovations that could disrupt and threaten their interests.

This cross-industry M&A activity makes Generational Equity’s expertise across all industries a valuable tool for its clients.

7) Strategic M&A is the Fastest way to Grow a Company

Finally, while we have heard above about the economies of scale sought by Private Equity firms when bolting smaller acquisitions onto larger existing concerns, it has become increasingly evident that firms are seeing acquisition as the way to grow.

In fact, there are many benefits in growth through acquisition:

Your new business arm has a tried and tested track record, which removes the element of speculation from expansion.
You hire a skilled and cohesive workforce in one hit, removing troublesome recruitment issues.
In acquiring a rival, you may expand your operations further.
In acquiring a supplier or a customer you may benefit from supply chain efficiencies.

These benefits have not gone unnoticed by businesses who have seized upon M&A activity as a tool for growth, especially where their industry allows little scope for organic growth.

So Sell Now – But Sell How?

Hopefully these 7 tips have helped you become aware of why now is one of the strongest seller’s market in history, and which elements to look out for to spot one in the future. But knowing when to exit a business is just half the battle – you also need to know how.

Dr. John Binkley, through his leadership of Generational Equity, has worked hard to extend this knowledge to thousands of business owners each year. You can discover more about the process of exiting a company through Generational Equity’s in-depth M&A insights.

How Can Your Business Capitalize on Record-Breaking Private Equity Activity?

May 25, 2018 By John Binkley

When determining your exit strategy or looking to attract investment into your company, it is important to remain open-minded with regards to who classifies as an “optimal buyer.”

Something Dr. John Binkley has identified among business owners in his time with Generational Equity and in the wider M&A market is the presumption that their eventual buyer will be someone from within their own industry (and likely a competitor), and it will be a straightforward 100% sale.

For some, this will be how their exit process pans out. But, there are alternatives. This piece is focusing on one of those options that can prove to be a win-win for all parties involved in a transaction – investment from a private equity firm.

Why highlight this now? Well, as Dr. Binkley has previously emphasized, we are in the middle of one of the strongest seller’s markets in recent history. But, beyond this, many are projecting that private equity activity in 2018, particularly in the middle market, may set new records after an already stellar 2017.

In this article, Dr. Binkley will outline what a private equity firm is and how a partnership with one can benefit business owners, explore the recent growth in private equity activity, and explain what business owners considering a partial or full exit of their business can do to market to these firms.

What is a Private Equity Firm & how do they operate?

“Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.” – Investopedia

In practice, a private equity firm seeks to enhance the value of a ‘platform company’ (or portfolio company), which they will then exit at a later date for a greater valuation. In order to do this, they will often earmark smaller add-on companies to support the growth of their larger investment.

These smaller companies are usually strong synergistic fits for the platform company, giving it access to improved technology, additional capital, access to new markets and more skilled staff, among other benefits.

This continued investment into the platform company will often be carried out over a number of years in pursuit of an optimal return, both for the private equity firm and the original owners of the business, who often stay on during this process due to their expertise and understanding of the company’s culture and industry.

In Dr. John Binkley’s experiences as part of Generational Equity, these private equity firm transactions are most often established through a partial sale. In these scenarios, the equity firm acquires 51% or more of the target company, existing management is retained, and the firm continues to invest into the growth of the company over time.

What are the benefits of working with a Private Equity Firm?

As a result, partnering with a private equity firm through a partial sale presents significant benefits for business owners who have reached their ceiling in terms of building their company’s value, or aren’t looking for a complete exit from their business. With investment from a private equity firm, a company might experience:

Greater investment of capital into areas of their company
Expansion of their operations
Increased brand awareness in new or existing markets
Implementation of more efficient processes
Introduction of new staff/management
Institution of improved technology and equipment
Enhanced marketing and sales acumen

An example of this in action can be seen in the sale of Tate’s Bake Shop to Mondelez International for $500 million. Tate’s Bake Shop was previously a portfolio company of Riverside Company, a private equity firm specializing in the lower middle market.

Thanks to the guidance, support and funding provided by Riverside, Tate’s was able to grow beyond its pre-existing means at an exceptional rate to achieve this valuation upon their sale. For the owners of the company, this meant they were able to pursue further growth with the help of like-minded individuals and receive a return on investment upon their exit they would likely not have achieved otherwise.

Is now an ideal time to consider Private Equity Investment?

Having a firm grasp on what private equity firms do and the benefits it can have for your business, whether you’re planning on selling the business or investing in its future growth, is invaluable in the current market.

As Dr. Binkley mentioned earlier, we could be on the road to a record-breaking year for private equity activity. According to PitchBook’s recent US Middle Market PE Report, $54 billion was invested in middle market private equity activity in Q1 2018, continuing the pattern set in 2017’s record-setting year for both acquisition value and volume of transactions completed.

Almost $55 billion worth of capital was realized in 2017 upon exit, a 55% increase on the previous year and only slightly short of the 2015 peak. However, it should be noted that 2017 represented a consistently strong seller’s market that was not skewed by one great quarter or a couple of standout transactions – both Q2 and Q4 were worth over $15 billion.

In addition, add-ons now represent more than half of all buyout activity, a much higher percentage than even a few years ago, while nearly 30% of companies backed by a private equity firm undertake at least one add-on acquisition per year. Furthermore, with the baby boomer retirement wave expected over the next decade (10,000 baby boomer business owners already retire every day), now is considered an ideal time to pursue investment before the market becomes crowded.

Why the interest in lower middle market companies? The numbers don’t lie – there are 350,000 companies with an annual revenue between $5 million and $100 million, compared to just 25,000 between $100 million and $500 million. So, with private equity firms sitting on a record amount of dry powder ready to be invested, they will look to the largest volume of companies to devote their time and money to, which also have lower risk associated with them.

It is easier for private equity firms to score runs with several one- or two-base hits than it is to score with a single swing that has the intention of hitting a home run.

How can I take advantage of increased Private Equity Activity?

With demand high for middle market businesses among private equity firms, the best advice Dr. John Binkley can offer is don’t delay in marketing your company to these groups. As previously mentioned, the market is set to become crowded over the next decade due to the retirement of baby boomer business owners, while at present private equity firms are urgently searching for new investment opportunities.

Whether your business is chosen as a potential platform company for a private equity firm, or identified as an effective add-on for a pre-existing portfolio company, there are plentiful opportunities to achieve an optimal value. With effective collaboration and investment, all sides stand to benefit and generate more revenue in the long-term.

It is encouraged to reach out to an M&A advisory firm like Generational Equity for further guidance, and to ensure you locate private equity firms that align with your own business goals. Realizing the potential private equity investment can have on your business is often predicated on a strong partnership and shared culture between all parties. So, getting professional support in assessing your options is essential in making the most out of a relationship with equity firms.

If you’d like to learn more about private equity and how it could play a key role in both the future growth of your business and eventual exit strategy, you should browse Generational Equity’s in-depth M&A insights. Their website contains numerous valuable resources on the topics of private equity, add-on acquisitions and exiting for the optimal value.

For more from Dr. John Binkley, be sure to visit his blog for further exit planning advice, management tips and recent updates from his activities.