Buyouts of small businesses booming
NEW YORK • For many small U.S. businesses, the easiest thing to sell right now might be the business itself.
Buyout activity is booming, and the prices being paid are at or near records for companies up to US$50 million in value, brokers say. Many small-business owners are fielding more cold calls asking if their companies are for sale, and owners who do put their businesses on the market are often receiving multiple bids.
“I’ve been doing this for 20 years, and I can say that if this isn’t the top market, it’s the top one or two in recent years,” said Scott Bushkie, principal at Cornerstone Business Services, a mergers-and-acquisition firm based in Wisconsin. “You’ve really got the stars all aligned.”
Among those stars: Companies that want to grow may see an acquisition as the easiest way to get trained workers amid a tight labour market. Lower taxes and lighter regulation have improved sentiment. On top of all that is a generation of baby boomers looking to sell and retire.
The market is so hot that Bushkie has heard some prospective buyers say they’re interested in a purchase, but they’re too busy at the moment with other acquisitions.
The jump in activity has pushed prices up. One traditional way that brokers set the price for a company is to look at its earnings before interest payments, taxes, depreciation costs and amortization, EBITDA.
In the first three months of the year, the typical purchase price was 6.1 times EBITDA for a company valued between US$5 million and US$50 million. That’s up by more than a third from four years earlier, according to surveys from the International Business Brokers Association, M&A Source and the Pepperdine Private Capital Markets Project.
In the insurance industry, prices have neared 12 times EBITDA, said Mike Shea, president and CEO of Shea Barclay Group. His company has made three acquisitions in the last 16 months.
“It’s really unprecedented, not only the volume of deals, but the competition for deals,” Shea said. “We’re excited to be on the buy side, but we also take into consideration that it almost reminds you of the housing market: Are we at the peak?”
Still, Shea and brokers across industries say they don’t see signs of the market cooling. Even recent increases in interest rates, which would seem to be a deterrent, haven’t dented deal activity. If anything, they may have pushed some buyers to make their purchases before rates moved even higher.
“You would think there would be a tipping point” from higher rates, said Craig Everett, finance professor at Pepperdine Graziadio Business School. “With the tax and regulation environment a little bit more businessfriendly now, maybe that’s delayed the change in valuations. But it seems like everyone thought that the valuations would be going down by now, and it hasn’t.”