The M&A Market Is Heating Up. Is the Time Right to Make a Move?

Not since 2007 has the National Federation of Independent Business (NFIB) reported that its leading index of business optimism, the Small Business Optimism Index, has topped 96, but that it did in May. While 96 is still below the Index’s historical average, it’s the trend that matters.

The driver of middle market business value is growth: sales growth, market growth and resource growth. Also, private company leaders who responded to PwC’s Trendsetter Barometer survey expect to outperform their GDP forecasts, and their expansion plans, PwC says, are picking up steam.

“Private company leaders expect to outperform their GDP forecasts, and their expansion plans are picking up steam.”


So despite a frigid eastern winter, which put the brakes on spending in Q1 with GDP contracting 2.9% in the U.S., and summer concerns over global conflicts and energy prices, the economy is still projected to grow 3% or better this year.

Meanwhile, as the benchmark 10-year Treasury Note remains below 2.6%, research firm FactSet reports that Consumer Sector M&A topped $26B in the first five months of this year—the hottest since 2008.

The S&P and Dow indexes both continued to make new all-time highs in May and June with no signs or reasons to abate just yet. The VIX (S&P Volatility Index or “the worry gauge”) is under 12, far below the 60 high mark it hit in October 2008 during the height of the Great Recession.

How long will this market “frenzy” last? And what does this mean for business owners in the middle market?

According to S&P IQ research, U.S. companies are able to borrow more than at any time during the last seven years. Senior debt multiples (Debt/EBITDA) could top 5x this summer. The previous high was 4x and even less during the recession. Not since 2007 have banks given such leeway. Banks have also loosened formerly more restrictive covenants. Today’s covenant-lite issuers are finding they have to compete more for quality loans, hence the easing. Covenant-lite loans open the door for more lending by allowing new borrowers access to more third-party debt, higher leverage ratios and lower interest-coverage ratios. When businesses can borrow more for less they tend to invest the additional funds in capital projects, stock buy-backs, dividends and M&A. And the sharp increase in M&A activity in 1Q14 supports that trend.

Private equity funds, in the meantime, are still looking to find and invest in high-quality solid-cash-flow companies and are paying up big time. According to FactSet, M&A buyout deal premiums for the three months ending May 2014 topped 56%.

My point in this summer bulletin is simple. Add all these data points and index measures together and the 2014 uptrend is clear. Increasing confidence, increasing demand, increasing consumer spending all translate into increasing valuations for small and middle-market businesses this year. So if you’ve been waiting to enter a better market to sell or buy a business, evaluate your options carefully as the heat of summer looks pretty cool for the middle market this year.

This article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC.

Rick Andrade: Rick Andrade is a Managing Director at Janas Associates, a Los Angeles based investment banking firm helping buy, sell & finance middle market companies. Rick has his BA and MBA from UCLA. He blogs at on issues important to middle market business owners.
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