The Current State of the Small Business Mergers & Acquisitions Market

Recently, I had the opportunity to hear Bob Goldsmith speak on the current state of the M&A market for small business. Bob is President and CEO of BCMS Corporate, LLC, a leading international sell-side advisor and investment banker to closely-held, middle-market companies having closed over 140 transactions worldwide in the last three years. Bob’s comments were very informative and listed below are some of the significant points from his presentation that every small business owner will find interesting:

1. Overall M&A activity has fallen drastically in 2012 compared to 2011 with the number of Q1 2012 transactions declining 18% and dollar volume off 53% over the same period. However, BCMS continues to see strong activity in domestic, international and cross-border transactions in the middle market segment ($5million – $50 million valuation range) as purchasers that may have been bidding on larger companies in the past now are looking in the lower middle market for opportunities.

2. Transactions between $50 and $250 million are receiving above average multiples (Enterprise Value/EBITDA>8x). Companies with EBITDA below the $4-5 million range are garnering somewhat lower multiples due to the perceived increased risk associated with these companies. Average middle market EBITDA multiple are in the 6.6x to 8.8x range.

3.  In the first six months of 2012, transactions under $250 million as a percentage of total deal volume has increased 35% over 2011, making up 34.9% of total volume during the period. Transactions under $50 million have increased 50% to 6.3% of total volume.

4. Approximately 80% of transactions completed by BCMS were sold to parties not identified by their client as likely buyers. In other words, in 80% of the transactions, the business owner had no idea who would buy the business, although they thought it would one of the 15-20 prospects on their shortlist.

5. Seller preparedness makes all the difference. This includes owner readiness, organized information, understanding the investment highlights and identification of potential hurdles. Proper preparedness doesn’t happen over a weekend, or week or even a month. The best happens over the course of many years where information is gathered and issues are addressed, thus the need for in-depth exit planning.

6. BCMS’s research into buyers’ motives for acquisition in order of importance are:

  • Enlargement of product, service, skills or technology (38.6%)
  • Consolidation of market or cost base (19.6%)
  • Customer base, contracts and brand (14.7%)
  • Financial investment (14.1%)
  • Geographic expansion (13.0%)

Business owners who are part of the multitude of privately held companies owned by baby boomers seeking liquidity events in the next several years should pay attention to state of the M&A market. With corporations sitting on $2 trillion of cash on their books and with private equity groups with an additional $0.5 trillion in equity overhang that needs to be invested, M&A activity over the next several years looks to be strong. The business owners who take full advantage of this situation will be the ones who have taken the time to properly plan for their exit and are properly prepared from both a personal and company standpoint when the time is right.


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