Terry Mackin is managing director of Generational Equity, a mergers and acquisitions firm that assists owners in stock or asset sales, mergers, or divestitures. Below, he answers questions about the current state of market for small businesses seeking to sell their businesses.
About.com: What if the small business owner decides that he would be better off selling his company rather than dealing with financing growth? What are the current market conditions for seeking an acquisition?
Terry Mackin: The economic conditions that have affected all of us in one way or another have most certainly taken a toll on small businesses. Luckily, there are some industries that have managed to navigate this recent downturn with less of a negative effect than others. For example, businesses with an emphasis in energy efficiency, niche manufacturing, and healthcare continue to show modest growth. On the other hand, I wouldn't be overly optimistic about marketing a business that is tied to residential or commercial construction, though some geographic sectors have allowed companies to fair better than others. For those who have weathered the storm, this can be a very good time to sell, as long as business owners are reasonable about their financial expectations from a sale.
About.com: How is the current financing market affecting buyers and their ability to get capital to make acquisitions?
Mackin: We are finding that the current financial markets are still very tight, but that lending practices are beginning to loosen up. On the lower end of the middle market there is still hope that SBA changes that have been proposed will finally reach the street. The bigger question is when private equity will finally get back in the acquisition game with more than a just a handful of deals completed thus far. It's estimated that there could be as much as $900 billion in untapped "dry powder," money that in previous years private equity would be planning to leverage with bank financing. We are now starting to see some private equity groups take the plunge, making acquisitions using all of their own capital with an eye toward restructuring the deal once bank financing comes around. We believe that this strategy will have a positive affect on getting the M&A market cranked up again and provide additional options for small business owners in the long run.
About.com: What creative ways are buyers and sellers using to work together to get a deal done?
Mackin:Most business owners who want to sell believe the option to get cash for their business and just throw the keys to the new owner is the only one they will accept if they are to let go of their business. While there are still a few buyers that are structuring all-cash deals and will let the business owner walk, for example in highly strategic and consolidation acquisitions, it is far more likely that there will be some additional incentives in a deal that will require the seller to wait for their balance of equity, remain on with the business for a longer period of time, or keep some of their own money and skin in the game. All of these methods for structuring a deal have been around for a long time, but now take on more meaning when buyers are trying come up with ways to create deal value without access to bank lending. At the same time, they are looking to leverage some of the risk inherent in doing a deal in the economic climate today. It is not uncommon right now to see acquisitions structured with less than half of the deal in cash at closing, with the balance made up of everything from retained accounts receivable, assumed liability, seller holdback, or all of the above. While all of these line items have solid value, it is up to the buyers now to convince sellers that they are good for the balance, and for business owners to ask themselves how much risk they are willing to accept to get a deal done.
About.com: What do you see is the future of the M&A marketplace?
Mackin: We are optimistic that the business of lending will return in the near term. Such an improvement will have an immediate, positive affect on private equity's involvement in the acquisition marketplace and allow private individuals the opportunity to get back to pursuing the American dream of owning a business. With changes in lending and the return of a more robust level of activity in M&A, we also believe that the value multiples being paid for small businesses will begin to inch back up. As always, patience is key for any business owner who is considering her exit options in the current economic environment, especially if she is planning to handle the daunting task of marketing her business on her own. It is always advisable for those that have spent a professional lifetime building a business to keep their focus on the all important requirement of running their company and look to professional assistance that can help maneuver them through the minefield that is the M&A marketplace.