Whether we like to admit it or not, M&A is a fashion industry!
Buyers flock to the same sectors and capabilities in groups and will immediately exit the same sectors just as quickly together if they see others leaving.
That is why we are keen to point out to as many sellers as possible that NOW is a great time to sell for three key reasons.
#1 Buyers Actively Looking for Acquisitions
We have seen around the world that as markets open up after COVID, M&A takes off.
The first reason for this is that M&A was put on hold during the 2020 lockdowns. Buyers were nervous about how COVID would impact business results and were not sure even how to do DD and get a transaction done without travel. Sellers were also cautious about how COVID would impact their immediate cash flow, operations and business worth.
However, as we left 2020, buyers and sellers have become much more confident about the business environment and have jumped back into M&A. The opportunity for sellers is that buyers have almost 12 months of transactions to catch up with!
The other opportunity for sellers is that during the 2020 M&A “pause” strategic and PE buyers have accumulated huge cash reserves and are desperately seeking growth. Meaning there is an increasing amount of corporate and investor capital looking for attractive assets.
On top of this, we are seeing industry-based trends that are driving acquisitions and higher prices for sellers, such as:
- In IT Services – Significant shift to Cloud and digital transformation
- In Engineering and Construction – Huge Government spending on infrastructure globally
- In People Services – Significant demand for staff because of closed borders
- In Industrial and Manufacturing – Great interest from family offices in “predictable” businesses
- Consumer – Massive interest in online or Amazon based consumer goods businesses
#2 Sale Prices in Many Sectors are High
With this strong interest from all buying groups across most sectors, prices are high.
As a gross generalisation, we are seeing prices being 20 – 30% higher than an expected normal at this time. So, if a business is normally valued at 4 times EBITDA you might expect to see it currently valued at 5 times. If the business is normally valued at 6 times we might now expect it to be valued at 8 times! Which can make a multi-million dollar difference for someone looking for a life-altering event.
Of course, there are many factors that influence the valuation of each business, but the general comment is that values are broadly up against the long time norm at the moment.
#3 Good times roll.. until they don’t
The final reason to highlight that NOW is a great time to sell is that in the same way as buyers flock to a sector, they run away even more quickly.
Having seen many IT, engineering, mining and mining services, various tech and many other sector booms over the years, we are reminded from our own experience that a hot market for acquisitions can rapidly chill. Looking back to the 2001 Dotcom crash, the 2007 GFC or the end of the infrastructure mining boom, we have seen many examples where business owners that were contemplating selling but were unable to transact, found themselves in the position of having to spend the next three to four years restructuring and working hard simply to restore the growth story they had before the crash.
So, for those of you who have clients that are (or should be) contemplating a potential exit, remember the adage that is always better to sell whilst things are going well and consider if 2021/early 2022 should be your time for exploring options.