There are eager buyers for small and midsized companies whose owners have powered through the recession and expect to see demand rebound this year. That's according to Bill Roman, the managing director of the Boston office of Harris Williams, which advises middle-market companies on mergers and acquisitions and focuses on sales in the $25 million-to-$1 billion range. While business sales fell dramatically in 2009, Roman says Harris Williams is seeing deals pick up in 2010. With few business assets in supply and high buyer demand, valuations for high-quality companies have held surprisingly steady, he tells Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.
What has happened to the mergers and acquisitions market for small and midsized companies over the past couple of years?
The number of deals we did declined by 65% or 70% during the first half of 2009. Average sales prices were down also because about 85% of the deals we did involved businesses that were under some type of financial disadvantage or were liquidating as a result of the economy.
Things started to come back a little in the third quarter and the numbers came back nicely in the fourth quarter of last year. That's continuing as we're getting into 2010, with most of the activity on the ends of the bell curve: High-quality, proven companies on one end and distressed companies on the other. Activity seems to be back around the level of 2005. It's unclear whether this will continue throughout the remainder of 2010, but the first half of the year seems to be firm.
How far did business valuations fall?
Valuations were very much down in 2009. Over the past eight years, companies were selling at an average multiple of 7.1 times EBITDA [earnings before interest, taxes, depreciation, and amortization, a profit metric used in business valuation]. Valuations grew to the mid-sevens in 2005-2006 and by 2007 they had climbed to over 8.4 times EBITDA.
But in 2009, they fell to 6.3 times to 6.5 times EBITDA. What may be counterintuitive is that even during that period of disarray, those high-quality companies that were least touched by the economy were getting sold at what were very attractive valuations on a historical basis, in the sevens and low eights.
Many entrepreneurs who had hoped to sell postponed due to all the uncertainty in the economy. What's the outlook for them now?
If they've got a business that's held up well in the last 18 months, it's likely they could get a pretty good valuation. It might be off 15% or 20% from 2005, but it will be around the average we've seen over the last five to eight years. The key is going to be the health of the business. If the company is rebounding, a favorable valuation is possible. Prices are not as low as some people might expect.
Is the unavailability of credit affecting business sales?
From an M&A point of view, the lenders have greater capital allocations coming into this year than they had last year. Debt financing is starting to become available. It's not as readily available as in 2006 and 2007, but for quality companies it's available on reasonably favorable terms and the leverage that lenders are allowing is substantially improved over what it was last year.
Is there anything specific that a business owner can do to improve a company's valuation?
A lot of what's required is outside the entrepreneur's control. The biggest driver of whether you're going to be able to sell your business is your sales growth. You can try to improve that through marketing. And you can assess what your order book looks like and whether your quotations are up. An early indicator of a good valuation is your quote rate trending up, compared to prior sales periods.
Is there pent-up demand for new mergers and acquisitions?
Absolutely—both from strategic or corporate acquirers and from financial buyers. So many business owners are sitting on the sidelines because their business has softened. The corporate development people at the large corporations augment their organic growth with acquisitions, but they haven't been able to find quality companies recently.