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Advisors, Business Owners, Private Equity

11 Reflections on M&A in 2015


As 2015 came to a close, we at had a chance to take a breath and think about what we observed, and learned, in the past year. These reflections were generated from reviewing over 2000 investment opportunities, of which we deep-dived on 397, leading to 17 indications of interest, 5 letters of intent, and three acquisitions. We hope these thoughts prove useful in adjusting strategies and expectations in the new year.

1. Valuations continued to climb, driven by high leverage and other people’s money. Either people’s expectations are rightfully justified and the next 5-10 years will be extremely prosperous, or there’s serious pain ahead for investors (and LPs) who went big in 2015. Time will tell.

2. The economy roared back. We saw consistently improving financials across virtually every sector, except for oil & gas, commercial printing, and mid-tier restaurants. There were the occasional and expected stumbles, but most companies trended strongly.

3. Public and private valuations diverged. You can now buy public assets at much lower valuations, and obviously with far less transaction cost. As an example, IBM is going for 5.5X EBITDA, or Conrad Industries (CNRD) is less than 3X TTM EBITDA net of cash on hand.

4. Sellers seemed to have forgotten the Great Recession. The majority pro forma speculated that the future will always be up and to the right. Few cited any forthcoming obstacles or economic changes that could negatively impact business. While this isn’t anything new on the sell-side, an inability to acknowledge even potential bumps was widespread.

5. We saw more organizations using high-cost debt, like factoring, to supplement cash flow. For cash hungry business models, even profitable growth means cash crunches and we saw plenty of them. Their accrual-based income statements looked fantastic, but the organization was on life support. I predict we’ll see plenty of buying opportunities in 2016 from organizations that can’t properly manage their cash needs.

6. Adjusted earnings got ridiculous. No, you can’t magically subtract half your marketing spend, because it “didn’t work.” Yes, your third location opened two years ago that is wildly unprofitable still counts. My golf game would look very different if I only counted two-thirds of the holes I played.

7. Debt continued to dominate deal structures. We saw some highly-levered gambles taken and those deals are going to work out spectacularly one way, or the other. As a norm, we saw more and more leverage applied, even to companies with very clear histories of extreme cyclicality.

8. Proprietary deal flow skyrocketed as the result of our content marketing efforts. There are lots of people wanting to sell who have no idea where to turn. We happily helped them find their path. They likely found us through our work with Influence & Co., one of our portfolio companies.

9. Fundless sponsors proliferated and clogged up the system. There seemed to be a tidal wave of those bidding on deals who have no funding, very little track record, and a low likelihood of fulfilling their promises. This lead to lots of false starts, disappointments, and extended timelines for both sides of a deal.

10. A lot of deals seemed to rush into an LOI, only to fall apart. We looked at quite a few deals that demanded a lightning pace, for no credible reason. Most of those deals ended up falling apart. We encouraged the intermediaries and sellers we worked with to take a bit of time to date before rushing to the altar.

11. Rise of seller market testing. We saw a lot of deals where the sellers weren’t sure what they were looking for, or if they’d even like to sell. This looks to be largely driven by sell-side intermediaries promising the moon to sign up owners who are unsure of what they want.

Cheers to a healthy, enjoyable, and profitable 2016.

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