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Capital Ideas for Private Business

What Recession?

Look Who Is Buying Aggressively

By Gary Roelke, Principal
New York Metro Region, Corporate Finance Associates

sell businessBusiness reporters are all beginning to sound like Chicken Little these days, but our experience says exactly the opposite is true—our many New Jersey-based entrepreneurial clients tell us that they are doing quite well, thank you. So, who is right?

Both are, depending on definitions, of course. There is no question that an incredibly narrow group of easy-money financial entities are suffering from their prior excesses, and those have soured the housing sector. Also, a few pharmaceutical giants have had their wings clipped recently. But a recession? We don't think so. Exporters are riding high; service companies are struggling to keep up with the demand; and those who planned carefully and ran a tight ship all along are thriving now.

Still not convinced? How about this unusually long subtitle for the April 2008 article by Darren Dahl in Inc. Magazine: "Investors are loaded with cash. Boomers are looking to buy. Foreign firms are eager to invest. What does that add up to? A seller's market for your business." The article finishes with an insightful note of statistical caution: the huge Baby Boomer generation is beginning to retire, and that means nearly 20% of all successful businesses will hit the market in the next few years. For the first time in memory, the supply of viable sellers will overwhelm acquisition demand, making it a buyers market for much of the coming decade.

Prospective buyers of businesses are pushing their inside deal teams and outside advisors to work quickly and effectively—right now. Why? Because 2008 is a fabulous time to acquire an American business. Why? Because tight credit conditions have forced deal dilettantes and weakened financial buyers to sit on the sidelines. This, in turn, reduces (i) background noise in the marketplace, (ii) competition for opportunities, and (iii) in the long run, pricing multiples.

Even the Cassandra-like financial pundits are saying that the US economy should begin to rebound in the third and fourth quarters, so the window will be open long enough to accomplish most near-term strategic acquisition objectives.

OK, who is buying aggressively now?

Strategic Buyers
With the credit starved financial buyers out of play, access to acquisition targets is easier, so this is an ideal time to acquire selected technologies, proprietary relationships (both vendors and customers), facilities, management talent, geographic coverage, product lines and joint venture partners.

Well-funded Consolidators
For those well-funded, financially-motivated buyers who have the strength to over-fund deals with equity today and recapitalize once the credit markets return to normalcy, the field is wide open. Pricing and deal structures may be softer than in the recent past, and targets may be in a more constructive mood to discuss sale, roll-up, recapitalization and other transactions that would facilitate building a solid portfolio.

International Buyers
The US dollar is trading at a record low relative to most leading currencies, and America remains the largest single marketplace in the world in almost every category of product and service, so the timing is better now for international players than ever before in our lifetimes. According to February 2008 M&A statistics published by Mergerstat, during the past three months, the market share of international buyer participation in mid-market US deals has jumped an astounding 21.4% over the comparable prior period. Another notable thing has happened—Canada, UK, France and Japan retain their status as the most active acquirers of US-based entities, but now India, Sweden and the Netherlands have pushed their way toward the top of the list. Clearly, American entrepreneurs should insist that their 2008 deals be shown professionally (and aggressively) to qualified international buyers.

So, what about the sellers?

Should they panic? Not at all. There are many prospective buyers with the need to acquire businesses, for a host of strategic reasons. While no one is looking to overpay, strategic and off-shore buyers know they must pay fair prices and give reasonable terms, if they are to capture the most desirable targets with solid management teams in place.

Also, we're coming off a period of sustained growth in sales and profits, so well-run businesses should be on solid footing. In this softer economy, timing is perfect to either improve or cut under-performing operations, product lines and people, and then implement needed systems, controls and procedures—you know, everything on your to-do list that never made it to the top during the recent high growth phase.

These are ideal circumstances in which to create substantial competitive advantages and position your company to prosper in the inevitable upturn. The timing is great to seize market share from weaker competitors, either through aggressive, targeted sales campaigns, or through a carefully executed strategic acquisition program of your own.


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