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 700th 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 21st 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.