As the M&A Market Heats Up, Middle Market Companies Are Cashing In

By Brandon Brown
Phoenix Business Journal

Originally Published May 25, 2018, 12:10pm

Right now might be one of the hottest times in recent history in the mergers and acquisitions market, and some industry experts say if business owners are looking for an exit strategy, now is the time to move.

“The M&A industry goes through cycles and right now we are at a high point for both volume and valuations for businesses,” said Mark Young, a managing partner at CKS Advisors, a Scottsdale firm that represents both buyers and sellers in the mergers and acquisitions.

CKS usually represents companies in the lower middle market or with revenue between $10 million and $100 million.

Across the U.S., the valuation of companies that are being sold in that lower middle market hit record levels in 2016 and 2017, at an average of 10.4 times a company’s earnings before interest, tax, depreciation and amortization (EBITDA), according to PitchBook Data Inc., a company that tracks M&A transactions data.

An analysis from the Pepperdine Graziadio Business School found that the more cash flow a company has, the higher it will be valued. For example, companies with EBITDA of $0 to $999,999 were valued at 4.3 times their EBITDA and a company with EBITDA of $10 million to $24.99 million has a multiple of 7.4 times.

There are just more deals happening today than through most of history. According to PitchBook, 21,119 M&A deals took place last year, which was slightly down from 2015 and 2016, but still a lot higher than the number of deals happening in 2006 and 2007, before the recession.

Dennis Cornelius, Co-Founder and Managing Director, CKS securities

“This is probably one of the best times in our recent history, going back 30, 40 years,” said Dennis Cornelius, a managing partner at CKS Advisors.

There are a number of reasons why the mergers and acquisitions markets is so hot right now including, a good economy, a high number of buyers, a lot of capital available, interest rates are low and there are a lot of people looking to sell their businesses.

But the mergers and acquisitions market won’t stay hot forever. Young points out that interest rates have started to rise, there is always a chance of an economic slowdown and geopolitical issues, including tariffs, could arise and slow everything down.

Once the cycle starts trending down, these valuations are going to “collapse like an inflated balloon,” Cornelius said.

“If you’re going to get out, it’s serious time to consider it,” Cornelius said. “If you wait until next year or the year after that, you’re going to look back on ‘17 and ‘18 and say ‘I wish I woulda, shoulda, coulda.’”

While there are a number of people looking to exit their businesses, including Baby Boomer business owners who want to retire, not many business owners have prepared their business to be sold. Young said that a lot of their clients can take a few steps to fine tune their business, they can actually increase their valuation by quite a bit.

“Smart business owners do that ahead of time so that they are ready to sell when they want to sell or they are ready to sell when they get a phone call,” Young said.

Mark Young, Managing Partner, CKS Advisors

A lot of business owners don’t really know what their business is worth and sometimes they sell too cheap. Young and Cornelius from CKS said they are able to show businesses what they are worth and help them reach a larger market.

Last summer, CKS helped Gilbert-based First Impression Ironworks get acquired by MCM Capital Partners from Cleveland, Ohio. Young said they took First Impressions to 200 different companies and got interest from 50 firms.

Those firms then signed nondisclosure agreements and were given more information on the business. Of those 50, 15 sent letters of interest on acquiring First Impressions. The five best firms were brought in to meet with management and four of those made offers to buy First Impressions. Those offers were made by companies all across the United States.

“We found a perfect partner in MCM who will help us continue providing our great products and quality service to our customers and will be an essential partner in our growth,” Tim Cornelius the president of First Impressions said in a statement at the time of the acquisition.

Right now, it is pretty common to have buyers call up CEOs of Arizona companies making unsolicited offers, said Chris Kelly, who works U.S. Trust’s Phoenix office. But Cornelius said that for the best deal, a company has to do a broad search to find the best deal, money-wise and for what will be best for the company.

“You have to kiss a lot of frogs in the business to get the right buyer,” Cornelius said, “But when you find the right buyer, it’s pretty nice.”

There are different types of buyers out there. First Impression was bought by a private equity group, but there are also a lot of companies that want to make strategic acquisitions to help grow their business.

In March, CKS helped another Gilbert-based manufacturer, Heritage Windows and Doors, get acquired by Andersen Corp., the largest window and door manufacturer in North America. Andersen was looking at getting a Southwest window and door line and Heritage had a line that fit what they wanted, Young said, so that helped them close the deal.