By Perry Campbell, PhD
Well it happened again. One of my clients closed a deal for sale of their company last month at a price about 75% higher than their accounting firm had estimated before we started the process back in April. I’d first met my client 4 years earlier and provided some advice on the things they should do to be ready for a sale. Over the next 4 years they implemented much of what I recommended. This spring, my high tech client wanted a third party estimate of value before deciding to turn us on to market the company nationwide. The estimate was fairly reasonable although the multiple looked a bit high compared to what we’ve been seeing in the marketplace recently (see below for data from the first half of 2013). Nevertheless, this third party confirmation of value was what my client needed to make the decision to go to market.
We proceeded to do what we always do. We researched the industry, and developed a list of likely strategic and financial buyers that was then vetted by our client. In collaboration with our client, we prepared outstanding marketing materials: a one page teaser gave a snapshot, an introductory letter or email explained the rationale for investment, and a confidentiality agreement was provided for easy response. For those targeted buyers who signed a confidentiality agreement we provided a 46 page Confidential Business Review that described the company, its history, its future prospects, and industry trends. We transmitted the information, and began dialogues with interested parties, but we did not set a price. As always some buyers were more interested than others. With the most interested parties we facilitated conference calls with the owners. This effort produced some subsequent expressions of interest with prospective deal terms and pricing. The range of pricing was enormous as it often is, with some who wanted a bargain basement deal, others in the middle, and one that stood out as most willing to pay for the value that my client was bringing to the table. We focused on this buyer prospect while continuing to market the company to others. A visit to my client and a management presentation was arranged. My client also visited the buyer prospect and was able to confirm a good philosophical fit. After a couple of tries at a satisfactory term sheet, the outline of a very good deal emerged from our discussions. A letter of intent was prepared and it was time to bring in the lawyers and tie down the important items. We had previously recommended several Merger & Acquisition attorneys to our client had made a selection so that an attorney was already retained and on standby. The letter of intent was negotiated and finalized very quickly and due diligence commenced. Well before this time we’d given the client a list of potential due diligence questions, so a secure online data room had been established with a lot of the information needed. When the buyer’s due diligence list came in, additional information was uploaded by our client, and the review went smoothly. At the same time as due diligence reviews were occurring, the buyer’s counsel drafted the definitive documents needed to close the transaction. Sellers, their counsel and I reviewed the documents and through a team effort all the final deal terms were negotiated through a number of iterations. Conference calls happened mornings, mid-day, evenings and weekends and the sellers and their attorneys had plenty to do between calls, especially preparing disclosure schedules. Finally on the morning of the scheduled closing date, after we reviewed the final changes to the documents, it was a momentous occasion to hear the attorney ask the parties “With those final changes do we have a deal?” After a slight pause the sellers said “Yes, go for it”, and with that the finalization and closing process began. Shortly thereafter, the buyer’s CFO sent confirmation of wire transfers, and by that afternoon the sellers’ bank accounts were boasting a higher balance than usual. Now that I look back over the last 8 months, I feel pretty good about the result we obtained for our client. It’s not the first time we’ve beat expectations, and in several instances we’ve brought our clients replacement deals that far exceeded the deals they had previously negotiated with other buyers who failed to close. It’s all about following a proven process designed to find the best buyer and the best price. If you’d like to learn more, please call me at 800-240-4609.
We’d been hearing reports of a slow first quarter, then a slow second quarter in 2013, following the big flurry of activity at the end of 2012 with a lot of transactions driven by owners who wanted to exit under more favorable tax rates in 2012. Last month we completed our AM&AA Deal Stats report for the first half of 2013 and were able to confirm similar findings, but the picture was mixed depending on who was providing the data. Merger & Acquisition Brokers(like me) who earn transaction-based success fees reported a shop drop in the annualized deal closing rate and also the dollar volume of transactions in the first half, while they also reported a lower average deal size than ever before in our survey. On the other hand, M&A Advisors who typically charge for their time rather than success fees, reported a strong increase in annualized closing rate, dollar volume of transactions and a big jump in average transaction size. So it was sort of like Dickens’ Tale of Two Cities… for some it was the best of times, but for others it was the worst of times. I guess I was in the “worst of times” group but I still managed to help a local client close a deal with a buyer in Chile in the first half. The graphs below tell the story for AM&AA members as a whole.
Average and median multiples of EBITDA appeared to decline as seen in the graph below, but this is potentially misleading because of the well-known relationship between deal size and multiple, and the fact that M&A Brokers moved down market to complete many more smaller deals than in prior surveys. The historical average and median multiples from prior surveys are given below, along with a graph showing the frequency of reported transactions by deal size. In the first half of 2013, the $1-5 million transactions were predominant but there were very few transactions in the $25-$100 million range.
Looking at the average multiples arranged by revenue and by transaction size shows little indication of an across the board reduction in multiples, so we’ve concluded that the overall average and median multiples are not an indication of a broad erosion in pricing. Rather, it’s evidence that M&A Brokers had moved down market to fill their pipelines with smaller firms that carry lower multiples as a rule. The graphical indication of this pattern is seen in the following two charts.
We don’t yet have Deal Stats results for the second half of 2013, but our friends at GF Data Resources have recently reported an increase in average multiples for private equity deals in the 3rd quarter. That’s encouraging news and not too surprising since the stock market has been on a tear, and eventually high stock prices will tend to have a small positive effect on the market for privately held middle-market businesses. At least that’s what my friend Robert Groag used to show in his graphs of the Dow Jones Industrial Average vs. the average multiple for middle market manufacturing businesses. GF Data Resources reported that deal volumes were up slightly in the third quarter, as were multiples of EBITDA. Their average EBITDA multiple was 6.6 in Q3 compared to 6.5 in Q2 and 5.9 in Q1. The trend is encouraging for sellers and is apparently a broad trend across multiple sectors. If you’d like to discuss what all of the above may mean for you and your company, please give me a call at 800-240-4609 or send me a return email.
By Perry Campbell, PhD