Summer 2007: The "Credit Crunch": Don't Panic — Yet
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Since the first quarter of 2004, the M&A market has seen some historically high activity. This high activity has been driving up prices and proceeds going to business owners to record levels.
In the last month, the "credit crunch", driven by the subprime lending market, has been all over the news and is, in fact effecting all the financial markets. However, the effects of the credit crunch have had a much greater impact on the higher end of the M&A market; the "mega" deal market. To date, the credit crunch and the sub prime market collapse have not had a significant impact on middle-market M&A.
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 Mike Ryan |
Consider:
- The middle-market doesn't live and die with mega buyouts. Just because high end private equity firms are having problems selling high yield debt to finance their buyouts doesn't mean the average mid-market transaction is going to be impacted. Sure, there's a potential trickle-down effect here, but let's remember that some of the mega buyouts in the spotlight are looking to sell billions of junk bonds and leveraged loans on the backs of companies that most people agree they paid too much money for. That has little or no relation to financing a mid-market buyout where someone paid seven times.
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 Private equity firms are still sitting on a ton of cash. As most of us know, a private equity firm has to spend its committed cash within a certain time frame. Thus, waiting on the sidelines for an extended period of time isn't an option — unless the buyout firms start giving back their commitments, which is highly unlikely, especially if prices start to fall and companies potentially become better bargains. Buyout funds raise money so they can buy companies. Period.
- Banks have to lend to make money. Just because risk has increased doesn't mean banks can afford to sit on their hands. Terms might change, but banks cannot afford to turn their backs on private equity firms who, unlike one-off strategic buyers, will invariably become long-term clients.
- Growing by merger is still easier than growing organically. This time-honored adage is still true. A down market doesn't change this, and for well-capitalized private equity firms or cash rich strategic buyers, it could actually spur more M&A activity.
However, business owners are cautioned that the scope and magnitude of the credit crunch and how it will effect middle-markets M&A is still unknown.While there has been little or no effect in middle-market M&A to date, that could change in the near future and without warning. If a business owner is considering selling, the time to act maybe now.
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| The Top 10 Costliest Mistakes Owners Make When Selling their Company |
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Mistake #5
Mentioning a Price
An old adage in M&A states, "whoever mentions price first, loses" or "be careful of you ask for; you just may get it". Putting an asking price on a company will limit sale proceeds. For sellers, it pays to focus on value - a company's optimum earnings potential, its dividend-paying capacity and potential return on investment. This focus — in combination with a carefully structured M&A marketing plan that properly positions the business in the marketplace with accurate and compelling documentation, access to the right buyers and favorable timing — will serve to determine optimum market value: what a buyer is willing to pay.
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| Each issue of our newsletter will present one of "The Top 10 Costliest Mistakes." Then entire list may be viewed by clicking here. |
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| Frequently Asked Questions: |
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How important is confidentiality and can it be maintained during the process?
During The InterPrise M&A Process, it is imperative to take measures that will guard against competitors, employees, vendors and customers learning of the impending sale. No prospective buyer ever receives any information, including the identity of the Company without execution of a Confidentiality Agreement. Buyer visits, where possible, are held off site or after hours. Due diligence as part of The InterPrise M&A Process is conducted off site. InterPrise’s role is to assure confidentiality and protect our client business owner while creating value through effectively presenting the business to the market to assure the highest sale price.
It’s a still sellers market…but for how long?
The M&A market remains a Sellers Market ever since the first quarter of 2004. As historically slow as 2000 to 2003 were for the M&A market, since then M&A market has been historically high. Business owners are cautioned though. A change in the political climate with a presidential election in 2008 could greatly affect the economy, along with the potential for an increase in capital gains tax. Statistically, the time to sell a company is 6 to 18 months. If an owner is considering selling his or her company, the time to begin is now to avoid the potential “cost” of a changing political climate.
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| Each issue of our newsletter will present one of several "Frequently Asked Questions." The entire list may be viewed by clicking here. |
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Mergers and Acquisitions...
