Exit Planning For Companies Gets More Complicated

A Babson College survey on middle market companies ($5 million to $100 million) has found that the market for mergers and acquisitions has changed. Cash flow multiples have dropped, and will likely drop further, it says. But the survey urges business owners to plan their exit strategies in an orderly way, and to resist “timing” the market.

The survey, conducted by the college's Olin School of Business in conjunction with Exit Planning Exchange, tapped over 100 advisors to middle market companies for information on M & A deals going back to late 2008, as well as for their predictions on deal-making conditions for the rest of 2009.

Results showed that owners contemplating the sale of their businesses were facing a dual dilemma in the short term – that in most industry categories, valuations and cash flow multiples (EBITDA) had dropped steeply and were likely to drop further; and that the task of delivering positive company performance had been made more daunting by the current economic recession.

As a result, business owner frustration was at an all-time high, according to the study.
“Owners are worried about taking a haircut if they sell right now,” says RBF partner Paul Bardaro, a CPA, Accredited Business Valuation analyst and RBF's business valuation expert. “But as the Babson study points out, if you look at current multiples in a ten-year time frame, the numbers are pretty close to average,” he says.

“In fact, we're seeing that the market dynamics are favoring the seller at the moment. The age-old supply and demand economics are still at work.

“The overall poor economy and dreary capital markets returns, and to a lesser extent, corporate executive lay-offs, have created excess monies on the sidelines looking to invest in middle market companies,” observes Bardaro.

“Combine this with the trepidation of business owners to ‘sell low' and you end up with a case of demand outstripping supply.
“If the selling company has a clear, thorough and compelling story,” he concludes, “the demand will certainly be there.”