Business Acquisition Market Improves

Wave of boomers fuel business acquisition market

This article examines the upswing in the business acquisition market as holdouts from 2009 and 2010 are freed up, as well as the increasing number of baby boomers looking to move into the next phase of life.

Market forces have formed to support a strengthening market for business mergers and acquisitions in 2013.  The sale of privately held businesses are normally motivated by a combination of personal and family factors, unique internal business factors, and economic and industry conditions.

Many business owners that wanted to sell in 2009 or 2010 found that the recession  severely impacted their company’s value. Those owners who rode out the storm can now realize significantly improved valuations in the  market.

As we move through 2013, the national and regional merger and acquisition (M&A) market activity is showing a distinct improvement. Our firm has experienced a significant increase in interest from strategic buyers, as well as  private equity buyers interested in  investment opportunities in Montana. Interest rates, holding (yet) at historic lows, make investments in a private company an attractive opportunity.

Greater predictability of political direction after last year’s elections and getting past short-term crises has removed much insecurity in the transaction markets. Buyers had discounted business values based on economic uncertainty. According to George Lanza, Chairman of the International Business Brokers Association, “[p]eople might not like everything that happened in Washington over the last few months, but at least now they have the answers they need to move forward.” As buyers are gaining confidence, they are finding more businesses going to market.

One of the most significant long-term trends fueling the increased number of companies available for acquisition, is the wave of retiring baby boomers. The Census Bureau reports that 37 percent of business owners are over 55 years old. With the oldest baby boomers turning 67 years old, a surge in business owner retirements is projected over the next few years.

The wave of baby boomer retirement is the top reason driving business sales, according to the fourth Quarter 2012 Market Pulse Survey. This survey is an authority on business transaction market trends, which is co-published by Pepperdine University’s Graziadio School of Business and Management, the M&A Source, and the International Business Brokers Association.

Increasing valuations is another factor leading more business owners to seek a sale. The most recent three years of financial performance heavily influence business values. Years 2009 and 2010 were, again, in most cases, a low point in revenues and profits for many businesses. Since those low years are now fading out of the three-year window, company valuations today are at the highest level since before the recession.

According to the 2013 Outlook report by Axial Market, 72 percent of active buyers for lower middle market companies believe that valuations will rise or stay the same in 2013 as compared with 2012. A minority of those surveyed expect company valuations to decline this year.  The same Axial Market report found that most active industries for acquisitions in 2013 are projected to be healthcare, energy and utilities, and technology.  BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently that small business sales increased 56 percent in the first quarter of 2013 as compared to the first quarter of 2012.

It remains to be seen how quickly the buyer’s market of the last few years will turn into a seller’s market. The trend of more companies seeking to sell will allow buyers to continue to be selective. A company’s ability to sell will depend on the specific industry and the company’s organizational strength, financial performance and market position.  The immediate future looks healthy for business owners seeking to sell and for buyers looking to invest in growing companies.

[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/7/000/1ba/1b1/133a787.jpg[/author_image] [author_info]Bryce DeGroot, CBI, CMEA, CSBA, is president of Compass Advisors (www.compass-advisors.com) based in Bozeman, MT.  He can be reached at bryce@compass-advisors.com. [/author_info] [/author]