Middle Market Business

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

June 29, 2018 By Dr John Binkley - Generational Equity

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.

The Importance of Business Documentation

April 16, 2018 By Dr John Binkley - Generational Equity

If it’s not in writing, it doesn’t exist.

These words stand true in most aspects of life in the eyes of Dr. John Binkley. When you fail to note your ideas, beliefs, processes and more on paper, they are lost to the world in your absence.

Indeed, Dr. Binkley’s commitment to this saying was a driving factor behind writing his book, Character is King. He urges everyone reading this to write their own book or keep a journal, so your unique experiences and thoughts are kept alive, whether they are left just for your loved ones or preserved for the world to discover.

However, the importance of documentation increases exponentially for business owners, particularly when you are preparing to exit. If you want to achieve the optimal value for your company, keeping up-to-date documentation of its most important aspects will present an accurate reflection of your company’s worth, highlight instances where its value can be enhanced, and ensure your business is “buyer ready.”

In this blog post, Dr. Binkley expands on how documentation plays a fundamental role in your business sale, provides three key examples of M&A documentation, and the explains the significance of other documents that outline your business processes.

Documentation that makes your business “buyer ready”

It is important to establish immediately what documentation is essential to becoming “buyer ready.” No matter what, it is critical that you start documenting this data as early as possible, so you are in a position to exit your company when the timing is right, and not due to circumstances beyond your control.

Before you even present any information to a prospective buyer, this documentation plays a key role in an M&A advisor determining the true value of your business. Unless you have a background in finances, it is unlikely your immediate assessment of your company’s worth will reflect its true value. For Dr. John Binkley and the team at Generational Equity, this is the first step towards an optimal exit strategy.

Without a comprehensive collection of your finances, equipment, facilities, and other valuable data, it is impossible to provide an accurate reflection of your company’s value. This means you could risk leaving money on the table at exit, or you could have unrealistic value expectations and expect a higher value than the market will bear.

So, by starting to document this information early, long before you are ready to exit, it will speed up the process for an M&A advisor to determine your magic number, allowing you to enter the market as soon as possible and take advantage of favorable market conditions.

It sounds like a no-brainer, but you would be surprised at how many business owners are lacking the necessary information when they decide to exit, wasting valuable time to accrue this before it can be presented to professional buyers. Findings published in 2016 by the Association for Information and Image Management (AIIM) discovered that less than 25 percent of organizations capture data from paper directly into their business processes.

Professional buyers are going to want to see your financials, both historical and projections for the future, information about your customer and supplier base, current operations, staff details, a history of your company, etc. These will be required as standard and are essential to securing any realistic transaction with a buyer.

But, there is documentation that could prove extremely valuable in helping your business stand out against competitors. Remember – professional buyers examine hundreds upon thousands of prospective targets every year. In order to motivate them to pursue your business in a crowded field, it is highly encouraged you go beyond the minimum expectations when compiling your business documentation.

What’s an example of valuable documents that are often missed? One that springs to mind immediately is your off-balance sheet assets, also known as intangible assets. These will not be featured in your earnings and other financial records, but they have a significant bearing on your value in the eyes of certain buyers.

Ask yourself – do you have written records, statistics or proof of your company’s:

Patents, Trademarks and Copyrights;
Brand Value and Reputation;
Subscriptions and Service Contracts;
Software;
Video and Audiovisual Material;
Internet Presence?

Keeping a comprehensive catalog of your intangible assets can pay dividends when selling your business. Just because their value can’t be quantified in the same way as your earnings or equipment, you should not neglect them. Your ideal buyer will likely recognize more value in these intangible assets than others, enhancing your return on investment.

3 Essential M&A Documents

Dr. John Binkley’s experience with Generational Equity has familiarized him with the vast number of documents that are required to complete a transaction, especially when you want to ensure you are exiting for the optimal value. Here are three of the critical documents that you will certainly encounter when you engage in M&A activity.

Confidentiality Agreement

First and foremost, before transferring any key documentation to a prospective buyer, it is critical to have a Confidentiality Agreement drafted, preferably by an attorney who is familiar with the M&A process. If you reveal this information to a buyer without this being signed, you open your business up to a world of risks that can easily be prevented. This is a necessary expense to protecting your business during this process.

Offering Memorandum

Your Offering Memorandum is the comprehensive package that displays to buyers the factors that make your company a viable acquisition target. Usually ranging between 40 and 60 pages, depending on the unique conditions of your business, this will play a key role in convincing buyers to proceed with negotiations and pursue the most beneficial offer. Elements that will feature in your Offering Memorandum will likely include:

Three years of historical financials
Five years of projected financials
A full description of the company, including a complete history, its current operations, and future growth opportunities
A SWOT analysis on the business (strength, weakness, opportunities and threats)
Analysis of the projected growth of your industry
An examination of key clients and suppliers
Full disclosure of significant contractual relationships with suppliers/customers
An organizational chart with a focus on critical employees and their relationship with the company
A full list of off-balance sheet assets that make the company unique and successful

With this quantity of data, you can see why it pays dividends to start the documentation as early as possible. Furthermore, it is crucial that all information contained within your Offering Memorandum is accurate and truthful. The temptation to inflate numbers to entice a better offer might feel worthwhile in the short-term, but the due diligence performed by professional buyers will discover any discrepancies, which could significantly damage the trust between both parties.

Letter of Intent

Last, but undoubtedly not least, is the Letter of Intent (LOI). You may be unaware of this unless you have experienced an M&A transaction – it is essentially a neutral document that is designed to protect both parties during the deal, and ensures any breaks in this can be settled without one side being unfairly disadvantaged.

For instance, as the business owner, you will want to ensure time isn’t wasted compiling documents or negotiating with a buyer that isn’t committed to seeing the deal through, or is keeping an eye on other opportunities. In the same vein, a buyer may want exclusivity in negotiations and not have to enter a bidding war with another acquirer at the 11^th hour.

Through Letters of Intent, the interests of all parties are protected throughout the M&A process. The support of an experienced dealmaker in agreeing to the terms of an LOI can be invaluable in keeping deal negotiations flowing and ensure that your side of the equation is completely fair.

Diligent Business Documentation

In conclusion, Dr. Binkley hopes this article gives you an insight into how important writing and frequently updating your important business documentation can be to exiting for the optimal value. By tracking your key financial details, as well as often-missed intangible assets, you take massive strides in building a “buyer ready” company – one that is primed to enter the market when time is of the essence, rather than hurriedly preparing due to unforeseen circumstances.

Of course, the documentation mentioned above is just a taste of the documentation you should be keeping to ensure the effective operation of your business. Examples like business continuity plans and company hierarchies not only reduce the responsibility of running the business on your shoulders, as others can quickly be made aware of the required processes, but also demonstrate to buyers that your company is effectively prepared for all eventualities. This could be a valuable advantage in the pursuit of the right deal.

For more information on the kind of business documentation you should establish in your company, Generational Equity’s regularly updated insights include several articles dedicated to prominent M&A documentation and how they impact your sales value.

Alternatively, you can download their whitepaper entitled “Make Your Company Buyer Ready” to discover what documentation, among other things, helps to build your business with your preferred buyer in mind.

If you’d like to learn more about Dr. John Binkley, you can read more about his life and experience on his website.

Generational Equity Highly Ranked by Thomson Reuters

February 23, 2018 By Dr John Binkley - Generational Equity

When Dr. John Binkley first founded Generational Equity, his goal was to provide the most comprehensive support to middle market business owners by helping them understand M&A processes and assisting them in successful exits from their companies.

While much has changed and grown over the years, that vision has remained the same. For this reason, the 2017 Small Cap M&A Advisory Rankings, compiled by Thomson Reuters, are especially pleasing for Dr. Binkley.

In this piece, Dr. Binkley reflects on Generational Equity’s rankings from Thomson Reuters, what it means to the firm, and what he expects for the organization and the M&A industry in 2018.

Generational Equity Sealing Deals in the Middle Market

Every year, Thomson Reuters gathers data on the number of deals completed by M&A advisory firms in a range of values. The Small Cap Rankings cover disclosed values of up to $10m, $25m, $50m and $100m.

Dr. John Binkley was delighted to receive their 2017 edition, which featured Generational Equity in prominent positions in all four categories. Generational Equity was ranked the top M&A advisory firm for the number of deals completed up to both $10m and $25m. During a year of remarkable M&A activity worldwide, this was especially satisfying.

Furthermore, Generational Equity was also ranked second for deals completed up to $50m and $100m, demonstrating the firm’s expertise across all tiers of the lower middle market. In these categories, Generational Equity ranked above several other well-known names in the M&A industry, including Goldman Sachs, Jeffries LLC and JPMorgan.

However, what pleases Dr. Binkley most is how consistently Generational Equity has established a presence in these important rankings. It has been the top-ranked M&A advisory firm for the number of deals concluded up to $10m and $25m for years, according to Thomson Reuters.

It is this consistency that has cemented Generational Equity in a crowded field of firms, and demonstrates how many business owners trust the firm to manage and support their exit from their company.

These rankings were the ideal way to cap off a stellar 2017 for Generational Equity, a year that Dr. Binkley will hold long in his memory. In the midst of a strong seller’s market, the firm completed their 600^th transaction, broke their record for deals completed in a calendar year, and were named Investment Banking Firm of the Year by The M&A Advisor.

Of course, while these milestones, moments and accolades are wonderful – and certainly something Dr. Binkley is always pleased to receive – it is not what drives Generational Equity’s approach. It is just a welcome outcome; the true objective is to provide unrivalled guidance to business owners looking to monetize their largest asset.

That is what makes these rankings by Thomson Reuters especially pleasing. It is an indication that more and more business owners are approaching Generational Equity to guide their exit strategy and find the ideal buyer for their company. It also demonstrates the firm’s proficiency in facilitating these negotiations and closing deals that all parties are satisfied with.

This is the true source of enjoyment for Dr. Binkley – the knowledge that his organization is conducting their work in the right way and that middle market business owners, throughout the U.S. and Canada, are reaping the benefits.

What Does 2018 Hold for Generational Equity?

So, after a standout 2017 for Generational Equity, what’s in the pipeline for 2018? In Dr. John Binkley’s eyes, there is plenty of optimism that this year could be even more noteworthy for the firm, as well as for M&A activity in general.

That is because there are no signs that the strong seller’s market that encouraged deal activity last year will be slowing in 2018. There are several key factors present that are powerful indicators that now is an ideal time for deal-making, including:

A positive economic outlook
Low borrowing cost
Significant dry powder among private equity firms
Tax reform legislation

The tax reform could be particularly pivotal, as this wasn’t a factor in 2017. The dramatically reduced corporate tax rate, cut from 35% to 21%, provides more cash on the bottom line for companies across the country. This will undoubtedly incentivize professional buyers to aggressively pursue acquisitions in the interest of business growth.

Furthermore, as Dr. John Binkley previously discussed in his analysis of the latest Middle Market Indicator from the National Center for the Middle Market, business owners in this bracket are expressing near-record levels of confidence in the economy and their prospects for growth.

Therefore, at least in the middle market, everything is pointing towards this year’s M&A activity being at least on par to 2017’s, and arguably could be primed to surpass this. While this certainly isn’t guaranteed, it is a promising scenario that the entire team at Generational Equity is excited about.

Hopefully, this overall optimism among M&A experts, as well as the boost to buyer activity, will encourage middle market business owners to at least consider their options. That doesn’t necessarily mean selling a business or exiting entirely, but considering how they can use mergers and acquisitions to grow their company.

Want to Contact Generational Equity for Advice?

If you would like to learn more, contact Generational Equity to discuss this with the firm’s experienced dealmakers and advisors. Alternatively, you can attend their complimentary executive conferences, which are held throughout North America and offer a great insight into how M&A benefits a business and what goes into a successful exit strategy.

Plus, if you’d like to learn more about what the firm anticipates for M&A activity in 2018, Dr. Binkley recommends the following articles:

To conclude, Dr. Binkley has high expectations for 2018, both for mergers and acquisitions generally, and for Generational Equity to build on 2017’s success. He also hopes that business owners and professional buyers enjoy similar success for the remainder of this year.

Discover more about Dr. John Binkley by clicking here.