Perfect Storm for M&A: Flush Balance Sheets & Higher Valuations

As the dreary clouds of a post-recession ebb away, we’re starting to see the silver-lining turn to bright lights on the horizon. In short, there is a perfect storm that’s been a-brewing over the last year or so that’s beginning to trickle-down to the middle market. It’s what one in this industry might call a perfect storm. Here are some reasons why mergers and acquisitions in the middle market are heating up.

  1. Valuations of private firms are back up. The lull in private securities lasted much longer than originally anticipated, but the corner-turn has finally begun as privately held business valuations have come back. It certainly helps that the overall market made a 30% gain last year as well.
  2. Buyers are actively buying and larger companies have balance sheets flush with cash to make acquisitions. Corporate buyers, including private equity groups and family offices have more cash than ever. Some have claimed there is way too much money choosing too few deals, but what is a problem for buyers is a boon for the sellers who see nothing but upside potential in selling while the market is white hot.
  3. The overall market has improved greatly since 2008. Despite the fact that we only grew 0.1% (vs. the predicted 1.2%) in the first quarter, many prognosticators are still shouting “recovery”–most in part because it’s no longer a recovery promoted by the Federal Reserve. All cynicism aside, we’re nowhere near where we were in the doldrums of 2009 where just about all the assets in the world were frozen solid.
  4. The money is flowing better for bank lending in the financial markets once again. With the Fed continually running the printing press and the Dow hitting an all-time high yet again, the micro and large-cap companies alike are seeing a surge in market-caps like never before. It’s easier to get money at a good rate–if you’ve got the credit to do so–than ever before. Think for instance about how Apple is getting money on the cheap–motivated by the tax hit it would take if it repatriated the money to the United States. Issuing massive bond sales to avoid taxes and not promote growth seems crazy, but it’s at least a witness of one thing: it’s not as hard to get cash as it was a few years ago.

To recap, equity valuations are up in both the private and public markets. Debt funding is also flowing more freely thanks to the stronger financial positions across the board. All of the aforementioned factors are playing a role to create a real seller’s market for both private and public mergers and acquisitions.

But what does this mean for your business? 

Fortunately, the planets have aligned in 2013 and 2014 to make for some killer times for getting deals done and riding off into the sunset. The question is, when will the cycle end? We know these things ebb and flow, but predicting when then next fall will strike is anyone’s guess. I’ve always been an advocate of not selling until it’s truly your time, but decisions should also be weighted for external macro factors as well. The time to prepare to sell a business is long before you actually intend on doing a deal. Such a strategy can help prepare you for when the perfect storm hits, allowing you to take advantage of the macro trends that could net you millions more in net proceeds just based on the timing of your deal. When the waves are right, that’s when you need to hit the surf. This perfect storm in M&A won’t last forever. Let’s just hope when you’re ready to finally jump-in that the flurry hasn’t¬†completely died.


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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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