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Business Strategy | 2016 M&A Trends: Timing the Market

Business Strategy

By Joanne Baginski, CPA, CM&AA

Continued low interest rates, pressure to grow in a slow organic-growth economy, investor confidence in opportunities through acquisition, and a trend toward consolidation in many industries resulted in record years for transactions in 2014 and 2015. But with more than half of 2016 over, how is this year shaping up?

According to data from Capital IQ, approximately 24,000 merger and acquisition (M&A) transactions have closed so far in 2016. Maintaining the same pace would result in a year-end with around 42,300 — a 19% decrease from the 52,400 deals closed in the previous year.

EKS&H, in conjunction with several cosponsors, recently hosted a seminar for business owners called “Current Economic Trends and Market Factors for Timing a Business Sale” to give participants a deeper understanding of current market conditions. The following topics were discussed by the panelists:

 

Key Takeaways

  • bizstrategychart1M&A activity should continue to be relatively brisk throughout 2016, and the market is likely to see some businesses being sold for even higher multiples than in 2015.
  • For success post-sale, sellers should prepare for new financial and economic realities.
  • To ensure a business is ready for sale, sellers should ensure accounting, tax, financial, legal matters, and sales figures are in order.
  • To get the best deal, buyers should look carefully at every aspect of a target business and check for signs of future return on investment (ROI).
  • Buyers must think ahead to the post-sale integration and ensure the right people are on board.

 

The Current Landscape and Industry Opportunities

The past few years have seen several changes in M&A deals. One of the biggest changes is higher multiples. In 2015, many deals were made at six times earnings before interest, taxes, depreciation, and amortization; as of mid-2016, the number is approaching seven times. Because of the higher costs involved, buyers are approaching deals with more scrutiny to ensure they’re getting what they pay for and that there is a good chance of a strong ROI down the road.

Buyers are looking for letters of intent, confirmation on profit and loss statements, and robust results in quality-of-earnings studies. In addition, they are auditing employee benefits, risk management, pension plans, taxes, and other “hidden liabilities” so they know what they’re getting into. Buyers are offering to pay in cash and giving sellers what they want beyond the sale, such as a legacy position, the ability to stay on with the company, or an option to sell their remaining equity later.

bizstrategychart2While 2016 multiples for manufacturing have been consistent with the overall universe, transactions in the healthcare space are consistently higher. At the same time, we’ve seen an uptick in the enterprise-to-revenue multiples for technology transactions in the first half of 2016. While the market is ripe for sellers in many industries because of the high multiples resulting from a strong economic climate, no one knows what the future might bring, and various factors may affect the market.

 

Advice for Sellers: Prepare, Prepare, Prepare

  1. First, owners should consider their personal positions in relation to a potential sale. Sellers should definitely think about their wills or trusts before the deal is done, consider tax ramifications, and prepare their estate plans in a tax-efficient way. Another risk is property, which entails casualty and liability risk, so owners should be sufficiently covered or risk blowing the deal.
  2. Sellers should also be prepared for how they’ll manage their new capital after the sale; they should think of it as a business and be prepared to run it as such to create needed cash flow. Two of the biggest mistakes a seller can make post-deal are to be too aggressive or too conservative with investing.
  3. Next, owners need to prepare their businesses for sale. They should consider whether their businesses are really ready to sell and work with an independent advisor, if needed, to get an objective analysis. Working with a CPA advisor to make sure the company is reporting according to GAAP is critical, as is investigating issues through sell-side due diligence. Finally, sellers should consider buyer risk because lower risk means higher multiples.

 

Advice for Buyers: Examine, Examine, Examine

  1. Buyers need to prepare just as well as sellers in vetting potential businesses for sale. On the financial side, interested buyers should ask for monthly financial statements for the past two years and look them over carefully for any red flags. Buyers should also review all organizational documents, look for regulatory issues, and examine sales figures to ensure the target business doesn’t have “too many eggs in one basket.”
  2. After the sale, buyers should ensure the business runs smoothly by thoroughly scrutinizing existing or new management to run the division or subsidiary. Having the wrong leader can produce disastrous consequences, and buyers may even consider engaging the services of an industrial or organizational psychologist to help.

EKS&H transaction services offer more than 25 dedicated professionals with extensive industry, accounting, and financial experience. Our CPAs, CFA Charterholders, ASAs, and ABVs work on more than 60 transactions per year using experience, technology, and tools that provide greater understanding to all parties concerned.

To find out how our services can help ensure your next transaction is successful, please contact Joanne Baginski at 303-740-9400 or jbaginski@eksh.com.