I just returned from the bi-annual M&A Source and International Business Brokers Association (IBBA) Conference in Las Vegas last week. This was my second time in Las Vegas, and it only confirmed my first impression of the place, which is that it’s a weird town. If you can picture a Carnival Cruise ship with 2,000,000 people on it, then this is my image of Vegas. The conference, on the other hand, proved to be anything but weird. It was informative, invigorating, and confirmed much of what we’ve been seeing over the last several months. For those who don’t know, M&A Source and IBBA are the leading organizations of intermediaries dealing in business transactions for Main Street and Lower Middle Market companies (Main Street businesses are those with valuations of $2MM or less, whereas Lower Middle Market businesses are those with valuations between $2MM and $50MM).
The group of professionals that attend these conferences are some of the best in the industry. What I hear from them holds a great deal of validity with me. Additionally, representatives from 50 or so Private Equity Groups were there, and it’s always interesting to get their perspective. Without exception, they all said that values are getting “frothy,” meaning the prices being paid for companies are too high, even for Lower Middle Market companies. Over and over again they expressed frustration with sourcing and finding fairly-priced deals. That’s great for sellers in this end of the marketplace. On the other hand, my fellow intermediaries stated that Main Street businesses are still not seeing this kind of activity. Generally these businesses generate less cash flow and can support less debt, so they don’t attract the investor class as much. As a consequence they have less cash thrown at them. We see this in our own practice, and while improving, it still may be some time before Main Street gets frothy like the Lower Middle Market.
M&A Source and IBBA, in conjunction with Pepperdine University, produce an excellent survey of intermediaries nationwide called the Market Pulse Report. It gives a good sense of what is happening with Main Street and Lower Middle Market deal transactions. You can link to the recently published Q1 2014 Market Pulse Report to read more, but it confirms what I heard at the conference. Also of note from the report, bank lenders are re-engaging more aggressively in both Main Street and Lower Middle Market acquisitions; individuals are once again accessing home equity lines to finance their investment in a business; and the sentiment of my fellow intermediaries has climbed to 3.7 on a 5-point index, where anything above 2.5 indicates more advisors view market conditions favorably rather than poorly. This has been a sea change over the last year.