The Business Acquisition Market is Improving

The following article was published in the Big Sky Business Journal. This is Part 1 of a 3 part series. 

Market forces have formed to support a strengthening market for business mergers and acquisitions in 2013.

The sale of privately held businesses are normally motivated by a combination of personal and family factors, the specific business situation, and economic and industry conditions.

Many business owners who wanted to sell in 2009 or 2010 found that the recession had severely impacted their company's value. Those owners who rode out the storm can realize significantly improved valuations in the present market.

As we move into 2013, the national and regional merger and acquisition (M&A) market activity is showing a distinct improvement. Our firm has recognized a significant increase in interest from individual, corporate and private equity buyers seeking to invest in Montana. Interest rates, holding at historic lows, make investments in private companies an attractive opportunity.

Greater predictability of political direction after the elections and getting past short-term crises have removed much insecurity in the transaction markets. Buyers had discounted business values based on economic uncertainty. According to George Lanza, Chairman of the International Business Brokers Association, "People might not like everything that happened in Washington over the last few months, but at least now they have the answers they need to move forward." As buyers are gaining confidence, they are finding more businesses seeking to sell.

One of the most significant long-term trends fueling the increased number of companies available for acquisition is the wave of retiring baby boomers. The Census Bureau reports that 37 percent of business owners are over 55 years old. With the oldest baby boomers turning 67 years old, a surge in business owner retirements is projected over the next few years.

The wave of baby boomer retirement is the top reason driving business sales, according to the 4th quarter 2012 Market Pulse Survey. This survey is an authority on business transaction market trends, which is co-published by Pepperdine University's Graziadio School of Business and Management, the M&A Source, and the International Business Brokers Association.

Increasing valuations is another factor leading more business owners to seek a sale. The most recent three-years of financial performance heavily influence business values. Years 2009 and 2010 were a low point in revenues and profits for many businesses. Since those low years are now fading out of the three-year window, company valuations today are at the highest level since before the recession.

According to the 2013 Outlook report by Axial Market, 72% of active buyers for middle market companies believe that valuations will rise or stay the same in 2013 as compared with 2012. A minority of those surveyed expect company valuations to decline this year.

The same Axial Market report found that most active industries for acquisitions in 2013 are projected to be healthcare, energy & utilities, and technology., the Internet's largest business-for-sale marketplace, reported recently that small business sales increased 56% in the first quarter of 2013 as compared to the first quarter of 2012.

It remains to be seen how quickly the buyer's market of the last few years will turn into a seller's market. The trend of more companies seeking to sell will allow buyers to continue to be selective. A company's ability to sell will depend on the specific industry and the company's organizational strength, financial performance and market position.

The immediate future looks healthy for business owners seeking to sell and for buyers looking to invest in growing companies.