OCEAN CITY — It may seem improbable given some of today’s financial headlines, but the deal market for small and midsize private companies has come to life, and many entrepreneurs who’ve spent decades building companies are taking advantage.
A number of forces have come together to create this favorable environment, but the most important is very simple: demand, especially from U.S.-based private equity (PE) funds. During the boom years before the financial crisis, these funds raised an unprecedented amount of capital — about a trillion dollars globally, by some estimates — for the purpose of acquiring companies of all kinds and sizes. The inflows of capital came to a swift end in 2008, but the ensuing recession also caused the deal market to freeze up, leaving PE managers with no place to put the cash they had raised before the crisis.
Now the funds’ preset deadlines for deploying their war chests are fast approaching. In fact, U.S. PE funds targeting small and midsize companies (deal sizes of less than $1.5 billion) have about $57 billion in "dry powder" on hand, according to research firm Preqin Ltd. — nearly all of it coming due within the next three years. So, mindful of the maxim "use it or lose it," funds across the board are seeking acquisition targets.
Demand isn’t coming just from PE funds. Corporate, or "strategic," buyers have spent the past three years cutting costs and hoarding profits, amassing well-documented piles of cash on their balance sheets.
Today’s credit markets are motivating both categories of buyer. Interest rates are at historic lows. In addition, banks have shown a willingness — if a cautious one — to extend capital for merger and acquisition (M&A) financing to higher-quality companies, sensing opportunity in helping to fund acquisitions.
Like buyers, sellers have good reason to make deals. If a true seller’s market hasn’t yet arrived, it’s certainly brewing.
"We’re in a market now that business owners see only once in a long while," says Brooks Gallagher, who heads the Private Sales Referral Network at Bank of America Merrill Lynch, which connects small and midsize business owners with vetted investment bankers.
Next week we will dive further into the details of selling your business.
(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)