By Dan Smith, President, Capstone Financial Group
If you are a company owner, now may be the best time in the history of life to sell that company, at least from a capital markets perspective. This is simply because of the exorbitant amount of money in the universe chasing too few quality deals. This trend is particularly exacerbated by the crazy lending levels of the past several months.
We have all heard about the “overhang” of private equity firms who are sitting on $500 billion these days to be spent on the acquisition of companies. This trend has caused high levels of M&A activity for at least 15 years. However, the factor causing the frenzy now is the level of debt lenders are willing to put on these acquisitions. We have seen the nation’s largest bank agree to loan 7.5 times EBITDA for an aftermarket company. We have seen the nation’s largest commercial lender agree to loan 4.5 times EBITDA for a company with revolving OE contracts and substantial customer concentration, two factors that would have diminished lending enthusiasm three years ago. These kinds of advance rates resulted in 2013’s average debt / EBITDA multiples for all buyouts of 6.4x, compared to 5.3x in 2012.
Many private equity firms are using this newfound leverage to pay more than 10 times EBITDA for some private companies. In 2013, the median purchase price multiple for all buyout deals was 10.2x, vs. 8.6x for 2012, topping 2008’s pre-financial crisis multiple of 9.6x. Companies that were sold two years ago for a 5 multiple are now reselling for an 8 multiple, with most of these deals being traded between private equity firms. Some of these buyers are paying a 10 multiple and looking to sell at a 12 multiple or do an IPO. One such buyer used the example of a well-known aftermarket company that trades at a 14.8 EBITDA multiple. However, this comparison fails to consider that this company is just an exemplary anomaly in this industry, with its gross margins of 39.3 percent, compared to those of several other aftermarket companies whose margins are in the 16 percent range.
These trends are all about supply and demand. Lenders need to loan money and private equity firms need to put money to work or they will have to give it back and possibly close their firms, scenes reminiscent of what some have done the past five years.
There are still just too few quality deals at market to satisfy both of these types of supply.
As the managing director of one large private equity firm put it, “This is a good time to be a seller.” As another recently told us when discussing these sky-high prices, “That’s why we are not buying anything now.” Both of these acquirers agree that there will be of day of reckoning, with the latter taking steps to prevent that in his firm. In fact, Capstone has already started assembling a team of experts from various parts of the aftermarket to deal with the eventual fallout, since we have seen it all before. The aftermarket landscape is littered with such examples.
So for our current and upcoming clients that are sellers, yippee! For our clients who are buyers, we are advising them to not pay a 10 multiple for companies with commodity products and no customer brand recognition. As George H.W. (or Dana Carvey) said, “Not going to do it. Wouldn’t be prudent.”
If you are looking to be a seller within the next few years, now is the time to do so while the market is on fire. This can’t possibly last forever.
About Capstone:
Capstone Financial Group is an investment banking firm which assists owners of middle market companies with their financial needs, including mergers and acquisitions, recapitalizations, private placements, divestitures, and other financial advisory services. Capstone is backed by a highly experienced and knowledgeable team of financial professionals with firsthand knowledge of starting, operating, growing, and selling middle market companies. Visit us online at www.capfg.com.
To provide securities-related services, the president of Capstone Financial Group is an investment banking agent licensed with Burch & Company, Inc., a registered broker-dealer unaffiliated with Capstone and member FINRA/SiPC. To provide securities-related services, the president of Capstone Financial Group is an investment banking agent licensed with Burch & Company, Inc., a registered broker-dealer unaffiliated with Capstone and member FINRA/SiPC.
