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M&A Activity Should Increase, Demographically Speaking
As a middle market investment bank providing merger and acquisition services, both private equity groups and corporate buyers contact STATE CAPITAL inquiring "do you have any deals we should be reviewing"? Obviously, during this past recession, deal volume dramatically slowed. But, current M&A activity in the the middle market has picked up.
Longer term, however, there is an important secular trend that will greatly impact middle market M&A activity; the exit of the Baby Boomer business owner.
Based on fundamental demographic trends, sales of private businesses should increase over the next decade. The implications of this trend are substantial. The volume of deals coming to market during that period will make it challenging for any owner to distinguish his business relative to others being sold. Therefore, an owner should focus his efforts on doing anything he can do to to distinguish the business.
Here are the facts:
• There are over 75 million Baby Boomers, those born between 1946 and 1966, now between the ages of 44 and 64.
• Majority of Baby Boomer wealth is held in 12 million privately held businesses. Approximately 70% of these businesses are expected to change hands in the next 10-15 years. (Robert Avery, Cornell University - 2006)
• Only 30% of family owned small businesses make it to the second generation and only 15% make it to the third. (Small Business Administration)
• The generation following the Baby Boomer is much smaller. Therefore, as the Baby Boomers exit their businesses through sales, there will be far more sellers than buyers...possibly a glut of sellers.
• Even during a healthy economic environment, less than half of the owners who tried to sell their business were actually able to do so. Estimates have indicated that in general, 70% of sales of business with revenue of $3 - $10 million do not close and about 50% with sales of $10-$50 million do not close.
The good news is that if a business owner begins to focus on certain key items six to 24 months in advance of pursuing an exit, the outcome can be much more favorable. Properly planning and preparing for an exit can increase the value of a business by 20-30%.
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