Top 3 Takeaways from Middle Market M&A in Q1 2017

  • By: Brett Pantazi

    Middle market M&A activity overall continues its quick pace. Nolan closed three transactions in the past three months, and we have eight additional engagements underway. Our deal pipeline remains strong, and we are observing an uptick of buyer and seller prospects indicating a willingness to test the M&A markets.

    These business owners (and now potential sellers) have seen significant growth over the past seven years and believe now is the time for exit given economic tailwinds and a potentially more advantageous tax code. Our daily conversations with private equity groups embellish this observation; many of these investors have seen a significant uptick in deal flow since the end of 2016. We expect this activity to continue throughout 2017.

    Below are three takeaways from today’s market that we’d like to share. If you have any questions, or if there is anything I can do to help you, don’t hesitate to connect with me.

  • Observation #1: Today’s Valuations Are Two Full Turns Above 2010’s Levels

    2016 Median EBITDA multiples were 9.2x, or two full turns above 2010’s valuations according to PitchBook. Additionally, 2016’s average M&A deal value more than doubled 2012’s value.

    Updated Q1.
    Source: PitchBook

    What This Means For You

    The M&A window is open. Company valuations have steadily risen since the Great Recession. How much longer can the market grow at this pace? Since 1945, the average economic expansionary cycle lasted 58.4 months. As of April 1, 2017, our current M&A expansionary cycle (as tracked by Nolan) since June 2009 is at 95 months.

    Strategic buyer and private equity demand is driving transaction volume and valuations for high-quality middle market companies. Buyers and investors continue to lament the limited supply of high-quality acquisition/investment opportunities in the lower middle market. Limited supply and healthy seller fundamentals have sharply driven up prices. Owners today have the opportunity to take advantage of this imbalance in the supply-demand curve.

  • Observation #2: Private Equity Helps Drive Sub $100 Million Transaction Volume

    Lower middle market private equity groups continue to invest in businesses with $2-$10MM of EBITDA (typically enterprise values less than $100MM). Companies in this size range often lie at inflection points. Owners may need additional capital or human resources to grow and would prefer not to make any further significant investments.

    Or, an owner may be great at growing to $5MM EBITDA, but not so great growing beyond that level. Lower middle market private equity firms are more than happy to provide liquidity (partial or full) to owners experiencing these inflection points and provide the expertise and capital necessary to take lower middle market companies to the next level.

    Updated Q1..
    Source: PitchBook

    What This Means For You

    Prior to the 2000’s, lower middle market business owners, for the most part, had one exit option: a sale to a strategic buyer. Today, owners with $2-$10MM EBITDA have multiple options in today’s M&A market. Strategic buyers, majority private equity sponsors, family offices and other investors, provide business owners a multitude of exit options that can be tailored to each owner’s needs. The options are no longer chocolate or vanilla; it’s a Baskin Robbins world today for business owners.

  • Observation #3: Smart Money Continues to Exit

    Private equity groups have averaged nearly 2,500 exits over the past three years, a 260% increase over 2009’s volume. Exit transaction value has grown nearly 5x during that same period. The so-called “smart money” continues to take advantage of today’s valuations.

    Updated Q1
    Source: PitchBook

    What This Means For You

    If Warren Buffett was exiting the market, would you? Private equity investors are expected to maximize returns for their investor base. Today they are exiting at a clip 2.6x greater than six years ago. Owners with exit options must consider their alternatives today.