The mergers and acquisitions market remains strong, with more than $3.6 trillion worth of worldwide acquisitions for the first nine months of 2007, up 50 percent over 2006, according to Thompson Financial. While the debt markets have tightened leverage multiples, deals particularly in the middle market are continuing to get done.
Smart Business talked with Bob Baltimore, director at Harris Williams & Co., to learn what contributes to the favorable sale of a company and what today’s market means for businesses considering M&A activity.
What makes a company attractive in today’s environment?
Regardless of market conditions, quality-run businesses will always generate the greatest demand in an M&A process. Companies that have an effective management team, strong financial performance and compelling growth characteristics backstopped by sustainable competitive advantages will almost always generate interest from the buyer community. Sellers should not overlook the importance of housekeeping. First impressions do matter, and this includes things as simple as organized inventory and well-maintained facilities.
How has today’s credit environment impacted the sale process?
Larger transactions, particularly private equity buyouts of more than $1 billion, have been the most affected by the turbulence in the credit markets. As an adviser focused exclusively on middle market transactions valued at less than $1 billion, Harris Williams & Co. continues to see a significant amount of activity. A key to success with any sale process is finding the right buyer. While credit has become more expensive in the middle market, financing sources are open for business.
What industries have experienced the most activity?
Activity has been very widespread across a broad array of industries. Within the last few months, we have sold businesses in energy and power, technology, transportation, health care, business services, building materials and consumer products. Clearly, certain elements of the building materials market, namely those focused on residential construction, have experienced a slowdown. But even in an industry that is under pressure, market leaders with a clear, effective corporate strategy can continue to perform well. Being an industry leader or having a distinctive niche within an industry provides the greatest opportunities in a sale process.
When is it a good time to sell a business?
Deciding to sell a company is one of the biggest decisions an entrepreneur can make in his or her lifetime, and there are a number of factors, both external and internal to the company, that play into the decision. Macro-economic conditions are an important consideration. The U.S. economy remains strong, providing growth opportunities for companies and pools of capital to an active community of corporate buyers. International buyers are taking advantage of a weak U.S. dollar, and private equity groups have significant levels of uninvested capital that needs to be put to work.
Internal factors are no less important however, including the strength of the company’s financial performance and the industry in which it operates. Furthermore, a sale can facilitate management or shareholder transition, provide capital for growth or liquidity to owners on a mature investment. All of these factors need to be assessed before considering a sale.
How can companies prepare for a sale process?
The first step is self-assessment. Management needs to examine the business as if it were the prospective buyer and address any potential concerns prior to marketing the company. A good sell-side adviser can help identify areas of improvement and ensure that the company is positioned well before a formal process begins. It is important that senior management research industry trends and the competitive environment to develop a clear picture of where the company fits. The next step would be to develop a three-year growth plan to demonstrate the opportunities to prospective buyers. Based on the company’s specific situation, accountants and other advisers may also be beneficial in preparing the company for sale.
To learn more, visit PNC’s Middle Market Advisory Services at pnc.com/joinus or go to harriswilliams.com.
This article was prepared for general information purposes and does not constitute the provision of investment, legal, tax or accounting advice. Any reliance upon this information is solely and exclusively at your own risk. M&A advisory and related services are offered through Harris Williams & Co., one of the nation’s largest middle market M&A advisors. Harris Williams & Co. is the trade name for Harris Williams LLC, a subsidiary of The PNC Financial Services Group, Inc. Harris Williams LLC is a registered broker-dealer and member FINRA and SIPC.
BOB BALTIMORE is a director at Harris Williams & Co. Reach him at email@example.com.