Five Things to Know About Middle Market Mergers
& Acquisitions (M&A).
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to Research & News)
The Middle Market M&A is a different market.
The middle market, where most businesses lie, is usually
defined as companies that fall between roughly between
$10 million and $200 million in value. Middle market
companies are too large for Main Street brokers but
too small for Wall Street, and are often overlooked
in market studies done by the large investment banks.
The average seller multiple for a middle market company
is also remarkably different from the average public
company multiple.
That report you’re reading in The Wall
Street Journal about M&A isn’t about the Middle
Market.
The media often feeds us a picture of Mergers and Acquisitions
that is both exaggerated and fanciful. Almost everyone
who covers M&A has a perspective determined by large
public companies, which are legally required to provide
full financial disclosure data about mergers and acquisitions.
Private companies, however, are not required to do this.
Naturally, this means that Wall Street deals receive
a great deal of press, but middle market deals, which
are actually more economically important, receive little
coverage.
In a down cycle in the Middle Market it’s
usually the number of deals that suffer more than the
actual valuation.
Middle market deals are less affected by the swings
in valuation caused by public companies acquiring with
their own stock. These deals tend to drop in number
rather than valuation during tougher economic times
as buyers naturally become more cautious. However, it’s
universally believed that deal volume is down due to
the difficulty of obtaining financing to complete the
transaction. Hence, it is really bankers who decrease
middle market deal flow during downtimes by denying
financing.
Bad news is always good news for someone.
Some industry segments actually sell better during an
economic downturn. For instance after the “dot
gone” Internet valuation meltdown several M&A
industry trade publications had interviews with private
equity groups that discussed their sudden interest in
boring, profitable industries and add-on acquisitions
within these industries to strengthen their current
portfolio. Another private equity group recently advertised
a sports car as a bonus to an employee who could complete
a particular transaction that fit a specific acquisition
profile. The truth is, even in the worst economic times,
billions of dollars worth of transactions still take
place.
Cash is not always a good thing.
This is may be hard for most entrepreneurs to swallow,
but cash, as opposed to a degree of structure in a deal,
can result in less after-tax value for a seller. Sellers
willing to consider structures including earn outs,
extended employment or consulting agreements and long-term
leases on retained real property used in the business,
can often realize superior values when selling their
companies. While a structured transaction may not always
be superior to an all cash deal, most sellers of Middle
Market businesses find that careful evaluation of alternatives
and advance planning with transaction professionals
adds value to almost any deal.
