Deal-Making - What does the Future Hold?
Posted by Tom Gledhill on Thu, Sep 24, 2009 @ 08:57 AM
The big M&A deals get all the visibility and we're starting to see some activity at the top of the business pyramid. But there is more deal-making going on beneath the radar screen. Buyers and sellers of small and medium sized companies have begun to stir, and indications are that this activity will continue to accelerate. The consensus among experienced business brokers and M&A advisors is that 2010 will be a very good year for deal-making. Many brokers had deals go south because the buyers were unable to get financing. But the sellers are still their clients and they are hopeful of getting a deal done in the foreseeable future. The climate for deal-making is certainly improving and there are many reasons for this:
Pent-up Demand - typically, following a recession there's a pent-up demand for goods and services. Purchases were put in a holding pattern. This is also true with business transactions. This process was amplified by the depth of this recession, the worst that most of us have experienced.
Baby Boomers cashing out - It's been estimated that the next several years will see the largest transfer of wealth in the history of the country. Boomers retiring or just burned out will be transferring ownership of their businesses. It's estimated that the number of businesses for sale will double in the coming years.
Technology - Rapid technology advances are driving consolidation. In distribution, for example, the profitability of individual companies depends on Inventory Management and Order Fulfillment. In the last ten years productivity has increased by 40% because of technology. Smaller companies that don't have this technology will be acquired by companies that have the technology.
Foreign Buyers - there's been a steady increase in the number of foreigners buying American companies. British, French, and oil-rich Middle Eastern countries in particular have been aggressively buying American companies.
Private Equity Groups - most Private Equity Groups (PEGs) have been in a holding pattern for the last couple of years and they are loaded with cash. Investors are beginning to apply pressure to these PEGs to do some deals after a long hiatus.
Credit Availability - Credit is easier to come by now although restrictions are tougher than they were a couple of years ago. The covenants are tighter and the requirements for a business loan are stricter with commercial banks. The SBA has lifted its limit of $250,000 for goodwill and some fees have been reduced or eliminated. However, the SBA is stricter relative to the experience requirements of the buyer.
Because of the recession, many corporations have downsized and become lean and mean. Consequently, there are potential buyers with business experience and money looking for businesses to buy. That, coupled with the businesses that will be available for sale, should mean a significant increase in deal-making in 2010 and beyond.