Owners of mid-market businesses who are approaching retirement age could take advantage of what financial analysts say is a significant premium when it comes to the prices the market is currently allowing them to command.
"The bulk of the companies we're dealing with are most commonly seeing multiples of five on the low side, and eight to nine on the high side," says David Mahmood, founder, chairman and CEO of Allegiance Capital Corporation. Mahmood steers mergers and acquisitions when it comes to low-middle to middle-market companies, which he defines as businesses whose EBITDA (earnings before interest, taxes, depreciation and amortization) range from $5 million to $50 million.
The multipliers Mahmood speaks of are also related to a company's EBITDA. The value involved is one way of framing a business's long-term profitability, a factor which contributes significantly to its sale price. The buyers with whom Mahmood works are offering prices at multiples of that long-term profitability amount. So five to nine times a company's long-term profitability means that middle-market business owners in these categories could command sale prices in the range of $25 million to nearly half a billion dollars.
"We see this across the board," Mahmood says, describing owners who are getting prices for companies that may not be all that asset-heavy, but are performing well financially.
With an eye on the timing surrounding this apparent window of opportunity, let's look at why the market is favorable for these kinds of business owners—and at how monetizing a life's work has recently become more of a sales scenario than one focused on inheritance and the next generation.
What's Driving Middle-Market Sales?
Why is this such an opportune moment for middle-market business owners to sell? Long story short, there's a convergence of factors that put a combination of resources and inventory in the right place at the right time.
For one thing, there's money on the sidelines. Analysts such as Mahmood suggest there's more cash in the realm of acquisitions right now than there's ever been in the history of U.S. business. In particular, private equity groups have raised more than $500 billion in recent years. Add to that family-wealth funds and venture capital firms, and you're looking at $1 trillion-plus in available funds with which to purchase. And while there are analysts who suggest the private-equity equation might mean it will take longer to loosen up that cash than business owners anticipate, but even cautionary analysts acknowledge that Mahmood's scenario is reasonable to examine.
Another critical factor is that banks are lending again. And not only are they back, but they're a force in the marketplace. "I have a company right now," Mahmood says, referring to one of his in-progress middle-market business deals. "They've got a franchise available they can acquire for $100 million, the company has $20 million EBITDA, and the bank is willing to lend them the entire $100 million. That's a lot of leverage available ... and bank money is the cheapest money out there."
Considering these circumstances, what kind of middle-market businesses are enjoying these advantages to the greatest degree? There are several types, but the focus is especially on manufacturing businesses with real assets. Experts such as Mahmood have also seen plain old service-industry companies successfully leverage the middle-market scenario in recent months.
How Middle-Market Became an 'It' Acquisition
To begin to understand the origins of the middle-market opportunity, let's start with the 2007 recession. In the United States, many businesses battened down the hatches and developed strong cash positions during the downturn. Private equity, which tends to provide its partners with healthy returns, became a sensible option for investors.
Now add to that cheap bank money, a continued influx of foreign capital—especially in the realm of real estate—and then the seller-side scenario. As the post-recession economy continues to improve, owners who lost a great deal in the late 2000s are looking to recover their losses and they're aging into the demographic of the retiree.
"Put simply, we have the graying of America," Mahmood says. "Ten thousand people turn 65 every single day in this country ... today, it's the Baby Boomers who are selling."
Mahmood also notes that more business owners are interested in selling and not passing along their business to the next generation. "Every owner of a privately held or closely held company has it at the back of their head that someday they're going to monetize the investment or otherwise pass it along to their children," he says. "One of the interesting things I find these days [is] the next generation has a different vision and isn't interested. Whereas it was once kind of expected the kids would take over, these days, the kids aren't interested."
With so many factors on the plus side of selling, the timing may never be better to consider your potential returns on the sale of your middle-market business. Because this buyer's market decidedly likes the middle.
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