What a difference a half a year can make! I just returned from the M&A Source conference in San Diego this past week. These valuable biannual conferences bring together M&A advisors from across the nation for in-depth workshops, specialized training, and exclusive education. At our last conference, held back in May here in Denver, the consensus among attendees was significantly more upbeat. While there was a growing uncertainty building by the war in Ukraine, concerns of high inflation, and possible interest rate hikes, most transactions were still moving forward, and many had assumed a small correction would be good for everyone. Fast forward through the second half of 2022 and the realization of these uncertainties has caused interest rates to double which has negatively impacted revenues and profitability for many owners forcing many transactions to fail or be pushed into next year. Below are two key take-aways from the November conference.
Buyers Are Still Active
While sitting down with many of the private equity groups (PEGs), despite the current economic conditions, all advise they are still actively looking for acquisitions. However, it seemed the target criteria PEGs are now using is a bit tighter and they’re less willing to look outside of strategic targets. For this reason, it is even more important to understand how a potential acquisition could fit into each group’s investment strategy whether it is a platform or add-on opportunity. Some of these groups were ready and provided “add-on” criteria to help in finding the right type of business. In speaking with different lending/finance providers, the dramatic increase in cost of capital spurred by high interest rates have pushed many financial buyers away for now but they remain hopeful that rates will soon come back down again. As more buyers choose to wait it out on the side-line, this could result in some pent-up buyer demand over the next few years. Our firm is still seeing buyers move forward but many have also pushed into 2023 instead of trying to close by end of year.
A Solid Employee Base Is Key
Based on the most recent survey of privately held businesses, the tight labor market is one of the top concerns today. The challenge of retaining/finding employees ranks even greater than concerns with high inflation or interest rates. The strategy for many buyers right now is “buying employees” which is why those businesses who operate W2s are in more demand right now. While more traditional multiples of EBITDA are still being used to value a business, the number of employees has become a significant factor in driving market value. In today’s market, a stable employee base with low turnover will attract more buyers and could significantly increase the valuation multiple.
Even though the last 6 months has endured a major market correction, the demand for well positioned businesses will remain and continue to grow. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
We remain grateful for the opportunity to work with so many great clients and professionals over the past 40+ years. All of us at The FBB Group wish you and your family a safe and healthy Thanksgiving!
Robert W. Amerine
President, CBI, M&AMI