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POSTED: Monday, May 21, 2007
by Brad Carlson
Strong demand and high prices characterize the business of buying and selling businesses, as well as activity in the manufacturing and distribution sectors not seen since before 9/11, brokers said.
Art Berry, of the Arthur Berry & Co. brokerage in Boise, said federal Sarbanes-Oxley Act standards on governance and accounting have impacted public companies, including smallish companies, to the tune of at least $1 million a year in additional costs.
As a result, investors, particularly private equity groups, are investing in businesses with $2 million to $20 million in annual revenues, and driving up prices, he said.
“It’s an alternative to investing in IPOs (initial public offerings of stock), and the net effect is a 20 percent increase in pricing for sellers,” Berry said. “There also has been about a 25 percent increase in bank leveraging, so there’s more low-cost debt available and more demand, which is just driving prices up.”
Market cycles relating to how many midsized businesses are sold, and at what price, resemble public securities markets in length and variability, he said.
Businesses that generate less than $2 million a year also command high prices now, Berry said.
“Small business ownership is driven more by the local economy and the number of potential buyers entering the marketplace,” he said. “Both of those continue to be at high levels locally, which makes it an ideal time to sell your business at the highest prices.
“We’ve been doing this for 25 years and I think we’ve been in an up cycle here for the past 15 years” in the small-business segment, Berry said.
Buyers are equally divided among people buying themselves a job and people who look at small business as an investment alternative – the return on which should be commensurate with the risk, he said.
Part of the price that the buyer pays for a business reflects “goodwill,” or going-concern value. “They are up for the same reasons,” Berry said. “A lack of profitable businesses to buy pushes up the value of successful operations.”
Bill Laska heads Laska Co., a Boise business brokerage that also helps businesses arrange debt and equity financing.
The manufacturing sector is strong, he said.
“Money and demand for manufacturing companies right now has never been higher, in my opinion,” Laska said.
Demand for manufacturing companies is as strong as it has been at least since 9/11, he said. Buyers include people moving to Idaho, private equity groups, and other manufacturers.
Manufacturing companies are buying smaller companies, taking advantage of strong earnings to capitalize on synergy opportunities that buying a smaller company can present, Laska said.
He expects this trend to continue, unless taxes and interest rates were to increase, because many large manufacturers continue to post strong earnings, he said.
Similar trends are continuing in the wholesale and distribution sector, Laska said.
“The companies with strong earnings have cash for acquisitions,” he said.
At Laska Co., sales of foodservice businesses and restaurants are flat so far this year. The small eateries continue to sell, but there has been a slowdown in transactions involving larger, independent, family restaurants. An influx of chain restaurants probably is a factor, Laska said.
Laska Co.’s sales of service businesses so far in 2007 doubled from a year ago, and sales involving manufacturing businesses more than doubled, he said.
At the same time, the company is getting more requests from clients who want Laska Co. to find a company for them to buy, and to represent them on the buy side of the transaction.
“The demand on the buy side has never been higher,” Laska said.
Even though business values are trending higher, most likely due to the amount of cash in the marketplace, business sellers don’t have unlimited pricing power, he said. Buyers generally won’t invest at above-market prices, he said.
Meg Carlson is principal in Boise-based C&H Group, a business intermediary firm and brokerage.
The business-transaction market continues to be very strong at all sizes of companies, she said. It remains a seller’s market, primarily because valuations are strong, she said, citing a Piper Jaffray M&A Monitor report.
“Deal funding remains abundant and relatively inexpensive, and industry consolidation remains a key growth strategy for many companies,” Carlson said. “Demand continues to outstrip supply as more acquirers – both strategic and financial – pursue a subset of strong, underperforming privately held companies.”
Idaho has seen not only large, high-profile transactions – such as Supervalu buying much of Albertsons and Microsoft buying Proclarity – but also a continued high level of small to mid-sized transactions with businesses under $25 million in revenues, she said.
“Activity is occurring in all industry sectors, with strength in branded companies, technology companies, distribution businesses, B2B (business to business) with unique market niches, and growing interest in strong retail concepts,” Carlson said.
Private equity groups or buyout funds intending to invest and build portfolio companies over five to 10 years are adding greater operating expertise to their teams in order to add value to their companies, she said.
“Speculation continues as to when this merger market will slow down, but there is near-term strength in deal flow and anticipated continued bullishness throughout 2007 and into early 2008 forecast by industry experts as long as interest rates remain stable,” Carlson said, citing Piper Jaffray reports.
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