Middle-market mergers and acquisitions powered ahead in 2006, and the outlook for 2007 appears very promising.
Record amounts of money flowing in from private equity firms -- entities that raise money specifically to buy companies -- have fueled an acquisition bonanza that has been breathtaking in its scope and duration. By Thanksgiving of this year, private equity funds had raised nearly $178 billion for 2006, already eclipsing the previous record of $177.5 billion raised in 2000. Fundraising by year-end could reach a staggering $225 billion.
It's no secret that private equity deals are making well-heeled investors rich, and some of the world's most powerful pension funds are also driving the unprecedented boom in private equity. According to Thompson Financial, for the 12 months through last June, the S&P 500 returned 6.6 percent whereas investments in PE firms would've returned 22.5 percent.
Private equity firms are lean and efficient and have the means to attract the best managers who are able to get things done without the scrutiny and regulation that public companies are subject to. And there should be several years of great opportunities ahead since capital will continue to be abundant.
But to add even more momentum to an already hot M&A market in the upcoming years is a demographic event of unprecedented proportions: the impending retirement of the baby-boom generation.
We are now in the initial stages of what is expected to be the greatest wave of business transition in U.S. history. At 83 million strong, baby boomers represent the largest single sustained growth of population in U.S. history -- and this generation started and grew hundreds of thousands of successful privately held businesses.
This is significant in the M&A context since boomers represent a huge pool of wealth and resources, and these owners are now faced with the difficult decision of how to retire and exit their businesses.
As the baby-boom generation ages (this year the youngest boomers turn 42 and the oldest turn 60), a host of succession problems have reared their heads.
One noticeable trend -- according to family-business expert Frank Schneider -- is that the children of baby boomers are less likely to take over the family business, and they face less pressure from their parents to do so. Statistics reveal today that only a third of family businesses are successfully transferred to the next generation, and a mere 13 percent are passed on to the third generation.
And the scope of the succession problem becomes more apparent when one considers that:
The intersection of private equity money and baby-boomer demographics means that those in the M&A industry can conservatively assume a threefold increase in transaction activity for companies with employees as boomers move into retirement (especially since 87 percent of all business equity transfers involve an M&A intermediary or a CPA).
This is according to David Fields, president of San Diego-based IBG Capital Markets, a company that specializes in educational seminars for business sellers. Fields adds that although this projection is speculative, there is statistical evidence that growth will occur within the U.S. business-ownership- transition service sectors for about the next 20 years.
For business sellers, there is a potential downside to the expected course of events over the next several years: The vastly increased supply of small-and medium-sized businesses available might lead to a glut of companies for sale. This would eventually drive down valuations and give new leverage to buyers.
And to compound the problem for sellers, there is evidence that the supply-demand implications of millions of businesses coming onto the market are not being factored into the exit planning of owners.
The best advice I could ever give to the owner of a middle-market company is this: Plan for the sale of your business from the day you start it. Most business owners exit their business with less than six months of advanced planning, consequently receiving a mere 50 percent to 70 percent of the business’s potential value.
Appropriate planning, well in advance of a transaction, will allow a business owner to maximize company performance.
|JOHN ZAYAC is president and founder of IBG Business Service, Inc. in Denver, CO. Reach him at 303-758-4000.|