Mid-Market M&A Activity

March 2002

M&A activity in terms of dollars and number of transactions is on the decline. It is doubtful we will see a repeat of the 90’s for at least a generation or more.

Financing is more difficult. In 1998, bank debt and non-bank debt, as a multiple of EBITDA (earnings before interest, taxes depreciation and amortization), were 3.5X and 1.7X respectively. By the first quarter of 2001 this slipped to 2.8X and 1.0X, representing a decrease of 1.5X EBITDA in funds available to finance an acquisition. This is approximately equal to the decreased selling prices of mid-market firms.

The deterioration of earnings has forced banks to reevaluate the wisdom of cash flow lending which fueled the high prices paid for mid-market companies the last few years. Banks are back to asset lending and selling multiples are based on EBIT (earnings before interest and taxes). Therefore, a company with good earnings and plenty of assets is more likely to sell for a higher price than a company with good earnings and fewer assets.

However, earnings remain the most important single factor in receiving a high price for your company. When you boil it down, Buyers buy the cash flow stream a business can generate.

The frustrating part about the current market is that there is an excess of equity and many Buyers, but few quality Sellers. Profitability has declined and Businesses are hurting. Cash flow streams are often negative.

If you haven’t tightened the belt on expenses, don’t delay any longer. Even with a recovery in sight, the ride may be bumpy.

It is not too early to begin preparing your business for sale. Whether you are considering selling your business near term or several years from now, proper preparation is key to maximizing the selling price of your business. M&A PROFESSIONALS will be pleased to meet with you to discuss preparing your business for sale with no cost or obligation on your part.