The recent M&A Source fall conference in Charlotte, NC was well attended and provided some valuable insights into the current state of M&A. Despite the cost of capital remaining high this past year, activity continues to be healthy, but buyers remain cautious while they persevere in their search for quality businesses that are well prepared to sell.
Below are a few key takeaways from the conference:
- Quality of Earnings or “QofE” reports are now being recommended by private equity groups to be completed by the seller prior to going to market. Typically, a QofE report is commissioned on the buy side as part of due diligence but with these uncertain market conditions, having a QofE done before going to market can help position the business to be more attractive. This trend comes from most buyers “doubling down” on the need for solid financial statements as inflation continues and interest rates remain high. If a business’s financial house is not in order, it may be well worth delaying going to market to have an experienced accounting/CPA firm evaluate the state of the corporate financials to ensure the business is ready for the fiscal scrutiny it will face.
- Bank Financing as expected has become more stringent as well. In one of the presentations the comment was made that “many lenders are returning to a 2008 mindset in some respects”. This makes evaluating a business with lenders before going to market or “pre-flighting” even more important to help identify potential lenders who are willing to get behind the business with a qualified buyer and help address potential pitfalls in available financing early in the process. Most firms like ours have built long-standing relationships with viable, experienced lenders, which can be the difference between a successful transaction compared to one that stalls out short of the finish line.
While today’s M&A activity has noticeably decreased compared to previous years, it’s clear that quality businesses with above average financials and solid positive trends are still very attractive in today’s market. In many cases, these well positioned businesses are seeing up to one full turn increase on EBITDA multiple compared to the rest of the businesses available which shows that investing in quality financials is a clear path to realizing this ROI at the closing table. The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI