Local Transaction Marketplace Update: Lower-Middle Market

After reading Mr. Bill Toland’s article in the business section of yesterday’s Pittsburgh Post-Gazette, I decided to provide Pittsburgh business owners with some insight on the current potential for sale of their closely-held businesses. While information regarding corporate mergers and acquisitions remains abundant, rarely have I seen the owner’s of small closely held businesses provided information on the likelihood of sale for their business. 

 To that end I offer the following points: 

  • We agree with Mr. Toland’s article that private equity firms have tightened their boot straps slightly over the past six to nine months.  However, keep in mind this tightening arrives on the heels of the largest private equity spending spree in the history of the United States.  So, even a little tightening of the belt still means sizeable access to capital.
  • Since a large number of businesses operating on a local or regional level are too small to hit the private equity radar, it is important to also consider the availability of debt financing through traditional third party lending institutions.  As you are already aware from the discussions surrounding the nationally declining real estate market, lenders have been drastically reconsidering to whom they are willing to lend.  While money remains inexpensive (low interest rates), access to that money has proven much more difficult over the last 6 to 9 months.
  • As corporate layoffs pick up again, we continue to observe a large contingent of executives exiting corporate America in favor of buying an existing business.  The growth of executive compensation over the last 10 years has enhanced the pool of individuals with sufficient capital available to invest in the purchase of a small to medium size business.
  • Although we feel the devaluation of the American currency does not increase the likelihood of a foreign acquirer purchasing a small closely-held local or regional business, we do believe that there is an indirect positive affect.  The devaluation of the U.S. dollar relative to most foreign currencies means American products and services are more attractive to foreign purchasers.  So, while foreign investors may not swoop in to acquire your company anytime soon, foreign demand for American goods and services is on the rise.  The business owners, who capitalize on this demand, will gain favor in the marketplace.
  • As we move from the information age into the conceptual age, increased specialization of goods and services continues to fuse people together in an effort to most effectively utilize resources.  This means individual investors, business buyers and management types are banding together to leverage individual assets to acquire and grow existing businesses.

While demand amongst buyers has not increased to the point where we are witnessing premium valuations, it has risen to a point where business owners need to consider capitalizing on the opportunity.  The right combination of the above factors has created a seller’s market, at least for the time being.