Trends in M&A Transactions

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Our friends at Ferguson Law Group, P.C., including Partner Kyle Ferguson, have posted an article describing merger and acquisition trends the firm is experiencing with its clients. K&A; can confirm several of these trends from recent transactions. In an ever-changing market, it’s important for a business owner to know what to expect when considering a sale.


Trends in M&A; Transactions

Despite the economy’s stifling effect on mergers and acquisitions during the past 2 years, Ferguson Law Group’s representation of clients in the areas of acquisitions, dispositions and fundraising has remained steady. In the process of helping clients manage the process of buying and selling their companies, certain market trends have become apparent, especially in transactions between $1MM and $10MM. Here are three of them:

Purchase Price

Three years ago, it would not have been unusual to see five to eight times multiples of earnings before interest, taxes, depreciation and amortization (EBITDA) as the basis for the value and/or purchase price of companies; today sellers are lucky to get two or three.

With companies struggling to stay afloat and owners looking to salvage what they can for retirement, it’s certainly a buyer’s market in the M&A; world. To make matters worse (if you’re a seller) or better (if you’re a buyer), conventional banks, non-conventional lenders, and even the SBA have substantially modified their lending criteria and are now significantly discounting the value of intangibles and goodwill in the business’ overall value. In order to get the deal funded with traditional financing, the purchase price must be substantially based on the tangible assets of the company and other objective criteria. Lenders are most often analyzing the value of the fixed assets of the business (such as furniture, fixtures and equipment), accounts receivable, inventory and normalized, historical cash flows for the previous three years.

In order to bridge some of the gap in expectations and financing feasibility, sellers are relying on complex payment structures. Creative combinations are now more effective and include a variable mix of cash at closing, seller financing, retained equity in the business, earn-outs and consulting/employment agreement compensation and benefits.

Time to Close

It is not uncommon these days for even the smallest financing transaction to take 90 days or longer to close.

Although lenders are still clamoring to get borrowers to bring them their deals, it is taking much longer to obtain a term sheet. Most preliminary approvals come with a laundry list of deliverables and conditions, satisfaction of which still does not guaranty that the loan will be funded. In order to reduce as much as possible the amount of time necessary to close, we are helping our clients to be more discerning in their choice of lenders and to be more prepared for more rigorous informational requirements fro
m those lenders.

Seller Participation

If you desire to sell your business, you better plan to stick around.

Pre-Summer 2007, sellers typically entered into a short consulting agreement to facilitate the transition of the company to its new owners, and if they really wanted to sweeten the deal (presumably for both parties), sellers would structure part of the purchase price as an earn-out with potential upside. Today, many sellers are required to maintain a long term financial and personal relationship with the business and buyer. Particularly in conventional bank financing transactions, sellers are now typically required to carry back a note for 10% to 20% of the total purchase price for 5 to 10 years which, of course, is subordinated to the bank’s primary lien on the assets of the business and usually subject to standby agreements delaying payment of principal and interest to the seller for a period of years. Additionally, lenders are more frequently requiring that sellers remain employed by (or consult with) the business for a minimum of one year to facilitate the transition and further ensure the continued success of the business. Special attention should be paid to any such employment agreement since dynamics can change dramatically as the parties transition from a buyer-seller to an employer-employee relationship.

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