by Bill Jarrett
Managing Director, TrueNorth Capital Partners

Because I’m an investment banker, I regularly field questions about when will the strong market conditions for middle-market M&A transactions dissipate. Recently, in response to this question, I told an M&A lawyer that I thought we were in about the “7th inning” of the market cycle. The lawyer was surprised, telling me that the consensus of other investment bankers with whom he was in recent contact was that we’re now in the “9th inning.”

Whatever the inning, M&A professionals are concerned that the prevailing strong market conditions may soon weaken, resulting in fewer transactions as business owners wait for the return of stronger market conditions before seeking to sell or recapitalize their companies. We certainly saw this after the last market downturn – seven long years ago. For many business owners, the opportunity to achieve a liquidity event is a once-in-a-lifetime and even life-changing event; thus, they’re often willing to make the necessary personal sacrifices and wait until market conditions rebound before effecting such a transaction.

For owners of privately held middle-market companies, there is a less obvious but important timing issue to keep in mind: the time it takes to complete a transaction. While, during this time period of strong market conditions, the pace of deal announcements has quickened, the time required to complete change-in-control transactions has remained unchanged. Typically, the process of selling a company, from preparation to closing, takes six to nine months. In that time frame, a lot can happen to M&A market conditions (e.g., market multiples of LTM EBITDA) as well as to a company’s recent financial results (e.g., LTM EBITDA) and near-term prospects – especially at the end of a market cycle. In other words, the key components of valuation – market multiples and company earnings prospects – are now subject to increased potential change during the sale process.

Interestingly, from the perspective of the business owner, the process of selling a company incorporates two contradictory notions about timing. In preparing for the marketing/negotiating phase of a transaction, “haste makes waste”. During the all-important deal preparation phase, corporate and other due diligence information is gathered, marketing materials are drafted and honed, potential buyer/investor lists are culled, and various financial models and projection scenarios are developed. Then, once the marketing phase is triggered, and until the closing phase is completed, “speed is of the essence”. At this point in the sale process, another common, albeit more crude, saying with respect timing becomes relevant: “Deals are like dead fish, they don’t get better with age.”

In the world of real estate, it’s “location, location, location”. In the current world of middle-market M&A, it’s “timing, timing, timing”.