How Income Disparity Could Impact Mergers & Acquisitions

Perhaps Pope Francis was onto something when – during his address to the United Nations last year – he urged dignitaries to resist the “economy of exclusion.” The data proves it: The U.S. is currently smack-dab in the middle of this exact scenario.

According to the Federal Reserve Board, the top 10% of U.S. earners took in 47.5% of the country’s entire income. In fact, the disparate concentration of wealth in the U.S. between 2007-2013 is exactly as it was in the years leading up to the Great Depression.

Janet Yellen (Chair of the Governors of the Federal Reserve System) has called this statistic one of the “most disturbing trends facing the nation.” That’s because, as Yellen and others see it, this disparity only serves to stunt economic growth and opportunity.

As a result, the M&A markets will surely be affected.

What’s in store for mergers and acquisitions?

Most recent data suggests positive M&A deal indicators in the U.S. GF Data’s M&A Report for August 2015 (for example) shows the transaction value for the first half of 2015 having increased from the same period one year ago. However, as income disparity continues to increase, long-term consequences (and perhaps, more accurately put, changes) seem all but inevitable.

Less isn’t necessarily more

One of the consequences of a striking income disparity is there are fewer true buyers at the lower end of the middle market. There’s less disposable income available, and not as much access to capital. As a result, an increasing number of lower market strategic buyers simply can’t cash out.

PEGs can benefit from this, and have, in fact, ventured into this market. However, they don’t typically pursue these types of investments because the lower market opportunities simply don’t provide the level of return that wealthy investors are after.

Of those buyers who do exist, they are becoming even more selective in where they invest. The result will likely be shrinking business valuations.

Forced to hang in a little longer

As baby boomers reach the age of retirement in droves, there’s the belief that we’d experience a deluge of sales. However, this hasn’t been the case with the lower middle market, and income disparity may very well be the cause.

Life expectancy continues to increase, which on one hand is wonderful news. On the other hand, it’s cause for concern for anyone looking to ensure they have enough disposable income once they leave their company. While some baby boomers can withstand the cost of retirement, a growing percentage of people simply aren’t that sure. Rather than take a chance and sell, they hold onto their companies as long as possible.

A new approach to M&A advising?

While the issues we’ve outlined are often politically charged and often published in a very negative light, income disparity could impact M&A in a positive note as well. When a problem arises, innovation comes to the rescue. As a result of the current economic climate, an increasing number of M&A advisors have adapted, and now market themselves as a resource to help sellers improve their enterprise value long before the transitioning process ever takes place.

The result is a growing and refined practice for M&A intermediaries, as business owners realize that the time to prepare for their inevitable sale is long before the transaction actually occurs.

Middle market business owners – and advisors need to adapt

While America’s income disparity problem causes headaches for middle market business owners, that doesn’t mean they can’t successfully achieve their long-term dreams, even following the transition process.

All this means is that these business owners – and the advisors who serve them – need to get creative while working within the confines of an economy of exclusion. Sure, there are limited opportunities, however, that’s an indication that it’s time to rethink the role M&A advisors in helping their clients meet their dreams.

RC Victorino
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