Is the 'credit crunch' bad news for business sales?
Reading headlines dominating the national print media and listening to the reporting by broadcast media of the “credit-crunch”, anyone could be forgiven for the belief that the entire US economy is about to hit the skids. Business owners, based on this, might deduce that now is a bad time to sell a business. Look beyond the headlines though and there is strong evidence that now is a good time to sell.
It would be wrong to dismiss concerns entirely and clearly we face some challenging times, some sectors are undoubtedly more vulnerable than others. It is important though to achieve some balance in reporting the wider health of the economy and the on-going capability of good businesses to finance growth, whether organic or acquired.
The mass media does tend towards a metropolitan view of the Country’s economic well-being, heavily influenced by financial services. Major corporations have enjoyed an unprecedented boom driven largely by financial services during which the fundamental rules of lending were effectively set aside, allowing inappropriate amounts of debt to finance inappropriate, unsustainable activity – compounding this over-lending. What has proven to be poor quality debt was then packaged up and sold on by the original lender to other banks and investors.
The mortgage market experienced the worst excesses of reckless lending but the larger company acquisitions market, which has now experienced rapid contraction, was also fuelled by easy access to debt.
Turning to the wider company sales market however, the reality is distinctly different. Smaller and mid-market deals are much less dependant on debt, particularly those involving strategic buyers and private equity which raised significant amounts of new money in the past few years, a good deal of which is still waiting to be deployed. What debt is needed, the banks can get comfortable with and accommodate without the need for syndication (bringing in other banks to share perceived risk). The vast majority of these smaller and mid-market transactions continue unnoticed, well below the radar of the national media.
The dearth of bigger deals is also likely to underpin interest in smaller and mid-market companies. This is reflected in our own internal measures; here at BCMS Corporate we track many different metrics but a key indicator of the health of deal-making is the number of signed Non-Disclosure Agreements (NDAs) our “Prospect Generation Team” receives from potential acquirers each month. The team is achieving record numbers [of NDAs] reflecting very strong interest from acquirers in smaller and mid-market companies. This in isolation would at best only suggest that deals will continue to happen. However, many of these potential buyers though are moving from NDA stage to meaningful meetings with our vendor clients, making competitive offers and progressing to completion – in fact the number of business sales we are completing is up on what was a very good 2007 for BCMS Corporate and its clients.
Deal-making involving strategic buyers in the smaller and mid-market sectors is incredibly resilient and, in our experience, remains in very good health. Smaller and mid-market companies and many active acquirers of all sizes did not, in the large part, “binge” on debt over the last few years – they stuck to the principles of good governance, have healthy balance sheets and the capability, when properly marketed, to attract buyers or to undertake acquisitions.
