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LATEST NEWS

"As Deal-Making Returns, Midsize Companies Are Seen as Prime Targets"
Posted on January 5,2014

search news THE United States is ripe for a boom in acquisitions of privately held companies.  That, at least, is the view of Dennis J. Roberts, chairman of the McLean Group, an investment bank in McLean, Va., that specializes in the sale of businesses with annual revenue of $1 million to $500 million. These so-called middle-market firms, which number about 1.2 million, collectively have annual revenue of about $8.8 trillion and a market value of $4.4 trillion. Mr. Roberts predicts that the resurgence of deal-making will begin within the next six months to a year as the economy improves and the middle-market mergers-and-acquisitions cycle pulls out of its current contraction. This time, though, in his view, the recovery will get extra thrust from the convergence of four other trends: burnout in the ranks of baby-boomer business owners, rapid technology advances that are driving market consolidation, long-term growth in the appetite of foreigners for United States companies and a buildup of cash at the nation’s 4,000 to 8,000 private equity groups. “There is tremendous, pent-up demand on both the buy and sell side,” he said. “These middle-market firms account for two-thirds of gross national product. And they aren’t going anywhere.” Harold S. Bradley, chief investment officer for the Ewing Marion Kauffman Foundation, a center for entrepreneurial research in Kansas City, Mo., says Mr. Roberts’s thesis is essentially sound, though he serves up some caveats. “Midmarket buyouts is where you want to be insofar as long-term payouts are concerned,” he said, adding that many institutions have “50 to 60 percent of their capital committed to illiquid assets like buyouts or venture capital.” On the other hand, he said, the easy money that pumped up returns in previous booms doesn’t exist today. And, he said, America’s stringent visa restrictions dissuade many foreigners from investing in American assets. “We educate them at M.I.T. and then send them back to India,” he said. Mark Danuser is betting that Mr. Roberts’s prognostication is correct — and says he believes he will benefit because his Denver mobile shredding venture is in a field that will prosper as long as people feel the need to destroy documents. Mr. Danuser, 56, is still reeling from the collapse of a deal in December to sell his firm, the Better Shredder, to a Canadian corporation for $2 million. “We were courted,” he said. “But we were jilted at the altar.” He is eager for a new romance, however.

He started the Better Shredder in 1996 on a shoestring, going into debt and delivering pizza at night to make ends meet. Revenue grew slowly at first, but then shot up by 15 to 30 percent year after year, to more than $1 million today. He has eight employees. Selling the company before he turned 60 was always part of his plan, he said, because he wanted to be young enough to jump into something else. If the M.& A. boom that Mr. Roberts is talking about materializes, Mr. Danuser figures he should get a good price. For one thing, his company is weathering the recession well, and he says he believes the demand for shredders will increase as printers become cheaper and people grow more concerned about identity theft and privacy protection. For another, he figures that a big company that wants to increase its market share or an investment group that spots an opportunity might decide that the time has come to make an offer. Mr. Roberts, whose McLean Group has offices in 30 cities and who wrote a book, “Mergers & Acquisitions” (Wiley, 2009) on the art of middle-market deal-making, said the suddenness of the turnaround would probably take the country by surprise. The danger is that business owners will sell their ventures prematurely. To avoid that, he recommends that they hire a specialist to evaluate their company’s pluses and minuses, even if they have no intention of selling it. Acting on the evaluation could sharply increase their business’s value and make them more money if they do decide to sell, he says. Even companies with annual revenue of $100 million or more often don’t have their paperwork in order. A classic blunder — one that has happened at one-third of the transactions he has been involved in — is the owners’ failure to document verbal promises they have made to subordinates. A professional outsider, he says, will “explore your relationships with key employees and show you how you can keep them bound to the company after the sale.” Parnell Black, co-founder and chief executive of the National Association of Certified Valuation Analysts, which has a membership of 7,000 certified consultants who specialize in evaluating privately held companies, also has some suggestions. Mr. Black, who has an informal partnership with Mr. Roberts’s firm, says that despite the recession, many baby boomers are eager to cash out of their businesses and pursue their retirement dreams. Even those who expect to stay in charge for the long haul, he says, should act to make their companies more efficient and to guarantee they will get top dollar when the time comes. “You need to have a track record,” he says. The golden rule is to set up a rigorous system to contain costs, a step that can reap immediate rewards. He tells the story of a small business that he advises whose Federal Express bill was running to $4,000 a month until management enforced restrictions on employees using the overnight service.

 

The monthly cost fell to $500. Three other steps that he recommends are studying every sentence of proposed contracts, locking in vendors and resellers for long-term relationships and training managers to assume other responsibilities to protect the company against the loss of crucial employees. Mr. Roberts, the investment banker, says baby boomer burnout will be a driving force in the M.& A. boom that he sees on the horizon. Of the 1.2 million middle-market businesses, more than 800,000, with a total market value of $3 trillion, are owned by people born in the years 1946 through 1964, he calculates. He estimates they will sell or leave to heirs 560,000 companies with a value of $2.5 trillion, and shut down or otherwise dispose of the others. The process has already begun, as some of the owners retire, become sick or disabled or find a sudden need for cash. “Those entrepreneurial fires can die more quickly than you’d think,” Mr. Roberts said. “One day you’re suddenly tired.” Source: NY Times