Valuations are at levels we haven’t seen since 2007 and concerns are rising about the sustainability of the market and the amount of leverage the middle market is taking on. We asked six senior bankers how this was changing the advice they gave potential sell-side clients as they think about an exit.
“I think there have been several impacts on the mid-market as a result of higher valuations and higher leverage.
The first is that higher valuations tend to drive greater selectivity on the part of buyers. And this applies to both Strategic and Financial buyers. As a result, buyers are increasingly demanding both top line growth and some level of profitability as evidence of business model viability. This doesn’t mean unprofitable businesses aren’t being bought – merely that it is becoming easier to attract buyer attention if the seller has critical mass.
From what I can see, higher leverage seems to be largely confined to Financial buyers – naturally leading to a greater emphasis on EBITDA. Interestingly, some buyers are choosing to “de-leverage” by partnering on deals while others are moving down market – considering acquisition opportunities that are smaller and therefore less expensive.
Regardless, my advice to potential and actual clients remains the same – “Continue to drive your business as if there is no acquisition process underway, while seriously exploring the potential opportunities created by the current high-valuation environment.”
We engaged Corum to obtain liquidity for some of our shareholders. With their assistance we were able to accomplish this objective and the preparation work helped us to eventually secure a significant investment from the venture capital community…we are happy with the outcome.