“In the U.S., everyone is chasing the same deal, driving multiples to the frothy levels of 7 to 9 times EBITDA we saw in 2006 and 2007, for strong upper mid-market companies,” says Jennifer Chasson, President of Springbank Capital Corp., a Toronto based corporate finance firm offering mergers and acquisitions, finance and valuation services to Canadian mid-market, privately owned businesses. This is driving more buyers to Canada where value is perceived to continue to prevail. However, with the limited number of solid companies in market, Canada is also a sellers’ market, with valuations climbing on this side of the border. “There are just not enough good companies for sale right now. So a lot of the private equity firms and strategic buyers are competing for the same businesses. Companies with a strong growth record and solid management are attracting a lot of interest.”
Jennifer expects this “seller’s market” to continue for the near term as the economy finally shows signs of picking up steam following the quiet M&A scene that North America has experienced since the recession. Because there have been fewer deals recently, in general, investors and strategic buyers currently find themselves with “dry powder” – M&A speak for cash in the bank sitting idle while looking for the right opportunity. Buyers are finding themselves in the precarious position of competing for a small pool of potential investments, which is resulting in upward pressure on values. To reduce acquisition risk, buyers are eager to invest in businesses with a critical mass of earnings. “If a buyer invests in a company with $5M plus in earnings, it is far more equipped to weather storms than a small business with a thinner bottom line. This is pushing buyers to compete aggressively for the few businesses for sale that have an EBITDA in that snack bracket”, says Jennifer.
Why are there so few companies for sale? According to Jennifer, many entrepreneurs are taking advantage of the improving economy, and are riding the wave of stronger sales and earnings to make up for lower profits, or even losses, endured during the recession. They’re focusing on building cash instead of thinking about selling. Is this a wise strategy? No one knows how long the seller’s market will continue, and Jennifer cautions, “the wave of Boomers selling their businesses is coming and it will change the tide to that of a buyers’ market”.
Written by: Jennifer Chasson, June 2014