In today’s highly competitive deal environment, strategic and financial acquirers in the middle market are facing many challenges. Moderated by Chris Connell, Partner and Co-Chair, Corporate, M&A & Securities at Stradley Ronon, ACG Philadelphia’s April Breakfast Briefing panel gave actionable insight into how this frothy market is affecting their overall strategies on sourcing, negotiating and closing deals.
Sean Coleman, Chief Credit Officer, FS Investments
Pat Dolan, Managing Director and Co-Founder, Delancey Street Partners, LLC
Billy Gonzalez, Senior Vice President, Audax Group
Alix James, President & CEO, Nielsen-Kellerman
Deep capital, private companies have their pick
We are in a competitive market, with significant debt and equity capital available. According to Sean Coleman, a competitive market in certain instances leads to disparity in value expectations between buyers and sellers. And with significant debt capital available, we’ve seen some owners elect to complete a dividend recap in lieu of selling.
Billy Gonzalez remarked that the market for smaller deals is becoming increasingly professionalized. Auction processes are commonplace, which means finding a truly proprietary, unbanked deal that does not have an intermediary is rarer these days than in the past. In this competitive market, buyers need to be able to demonstrate the value they bring to the table in order to stand out from the crowd.
Less time to do your work
The duration of the sale process is often accelerated in a competitive market, which can feel like buyers have less time to complete proper diligence. As a result, Pat Dolan is seeing more and more dollars spent in the assessment period of a transaction to help buyers control the amount of risk they take on. The key here is to hone and focus the diligence process.
Alix James, having recently gone through a successful financing round, highly valued when potential buyers exhibited clear, decisive, decision making. The risks may have been present, but an experienced buyer knows how to assess and make a quick decision.
Factors beyond the purchase price really make the difference
In a frothy market, buyers need to rely more on tangible strategies for value creation. It can be more challenging to create returns through organic growth alone when initial purchase prices are high. Sellers need to be prepared to pull more “levers” to add value that results in company growth.
Differentiation among buyers is key
Team diversity is a great way to stand out. With so many management team meetings, Alix James took note of buyers made up of diverse teams; still an unfortunate rarity in the marketplace.
Billy Gonzalez remarked on the importance of buyers displaying a meaningful understanding of the business and considering the needs and goals of sellers. Buyers that offer more than just capital, but also have a playbook of strategies and a partnership mentality to growing companies with management, stand out.
Don’t forget about the individuals on the other side of the table!
Deal flow is up, but quality is down
While the still-fragmented healthcare industry continues to be active for Billy Gonzalez’ firm, picking the right doctor group, with a like-minded approach to building the business, can make the difference between a successful investment and a challenging one.
According to Sean Coleman, sustainable businesses with recurring revenue, particularly SaaS models, are enjoying significant market interest. Additionally, Pat Dolan is seeing a trend of high private and public multiples in “test and measurement” businesses.
In terms of industries that have fallen out of favor, the general takeaway here is that we’re seeing record deal flow across many industries, but deal quality has suffered throughout the environment.
Everyone is getting squeezed and all parties are protecting themselves
According to Sean Coleman, today’s market puts pressure on all parties to close faster. Sponsor/lender relationships can often make the difference, as those with long-term relationships work effectively together to meet today’s time tables.
Exclusivity is not a given in transactions these days; buyers feel more pressure and sellers are equally faced with high demands under an aggressive timeline. Alix James felt having her company’s data room complete and populated before the sale process began was crucial to staying within their 45-day commitment window.
With that, all parties are exercising caution. As a result, representation and warranties insurance is considered on almost every deal, buyers are engaging more advisors and brokers and conducting deeper due diligence pre-LOI.
Sellers got the memo for the remainder of 2018
According to Pat Dolan, the M&A market is still very healthy and favorable with a lot of capital out there and the sellers know it. Sellers are now more engaged and better informed on the strategies involved to prepare their business for a strong valuation to get the most out of the pool of capital available in the market. As a result, buyers may be more vulnerable to mistakes in the diligence process and should remain true to their investment criteria.
Regardless of the higher number of sellers in the market, more deals are killed early in the process, as buyers are still looking to find quality deals and sustainable businesses.
What you need to know
In such a competitive market environment, with a large number of diverse buyers, there is an increased appetite to get deals closed. Timing is accelerated, and sellers are more informed. All parties need to focus diligence and properly structure the deal to mitigate risk.