For business owners thinking about someday selling their companies, Monday morning might be the time to start looking for a buyer.
It’s a seller’s market, and prices are either back to the levels of the hot markets before the Great Recession or — and here is the news — they are even higher.
It’s the private, far less visible side of what’s been happening in the public market, as most of us keep watching the Dow Jones industrial average surge to new highs.
Hunt Greene, co-founder and managing director of Minneapolis-based investment banking firm Greene Holcomb Fisher, is among those who called valuations “as high we have ever seen them.” It’s been a gradual move up for the past two years, he said, but it’s really a vastly stronger market now than it was even as recently as the middle of last year.
The valuation yardstick that people like Greene use for privately held companies is a form of price-earnings ratio expressed as a multiple of the earnings before interest, taxes, depreciation and amortization, or EBITDA. For a stable business in a good market segment, a price might be quoted as six times EBITDA. Or maybe seven.
That’s the pricing expectation Greene’s firm gave when beginning work last summer with a private company that Greene described generally as in the supply chain of a consumer product.
They then got 20 indications of interest from potential buyers, a form of nonbinding bid, and they invited the six that seemed most interested to meet with management. When the transaction closed in late 2012, Greene said, the price “was closer to 10 times EBITDA. It’s an indication of where people are willing to go [on valuation] and how they are willing to chase things.”
Greene’s firm just pitched its services to owners of a company he would only describe as a “consumer franchise business.” His team explained that the owners could expect the sales price to reach 10 or 11 times EBITDA. “These numbers are, at least to me, extraordinary,” Greene said. “If I could be a seller right now, I would think about going to market. Maybe even accelerate it.”
It’s demand that is putting the upward pressure on prices, what Andrew Greenberg, co-founder of Pennsylvania-based acquisition market information provider GF Data, described as “an unprecedented amount of capital that’s looking to be invested in business acquisitions.”
Corporate buyers are certainly well-funded, as the cash and securities holdings of the nonfinancial members of the S&P 500 reached $1.23 trillion as of the most recent report from FactSet. Then, there are the large capital pools of private equity investors.
In Bain & Company’s annual study of global private equity released last week, it called last year’s total deal volume of $186 billion “a disheartening figure considering that over the past decade both the number of active PE firms and the amount of [uninvested capital] committed for investment had more than doubled.” Bain estimated that fund managers had approximately $1 trillion to put to work at the start of 2012.
As for bankers’ willingness to finance buyouts, “the bank market is as receptive to this as it’s ever been,” said Elliot Jaffee, head of U.S. Bank’s commercial banking division. “You can see that in the data for both pricing and the terms.”
Jaffee said banks have strengthened their balance sheets and are looking for growth in loans. And he, too, advises business owners they may want to get moving on a transaction, saying that his team discusses with clients how interest rates remain very low, “and you don’t know how long that is going to last.”
You might imagine how buyers of companies view this same set of facts. If it’s your job to make shrewd acquisitions, it may be getting frustrating.
Van Hawn, a managing director of Goldner Hawn Johnson & Morrison, a private equity firm in Minneapolis, said he and his partners have made two investments out of the firm’s newest fund. Looking for new acquisitions puts him competition with what he said seems like 10 times the number of competitors his firm had when it started in 1989.
Hawn explained that a common recent experience goes like this, when learning how a nonbinding bid may have fared: “We get a call from the investment bankers. ‘We love you guys, but we’ve got 10 people with credible financing at least [one times] EBITDA higher.’ ”
“And do I put on my big boy pants and bid crazily?” Hawn said. “Or do you say, ‘We can’t make any money if we overpay.’ So I sit here with my hands in my pockets. That’s a choice.”
Given these market conditions, the choice for entrepreneurs and other business owners seems to be an easier one. Word of prices still inching up must be getting around, as activity in the past six weeks or so has picked up from a slow start to the year.