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How Long? How Fast?
Lots of variables are keeping the M&A market
hopping long after some thought it would wane
M&A activity in the LBM sector has
reached a feverish pace. Thus, it is
natural to look for signs of whether
acquisitions will slow or accelerate.
Just remember that those signs don’t exist solely
in a list of deals already done; you must also
account for market inquiries that have not yet
found their way to a deal announcement. And
while it is difficult to translate market feedback
and inquiries into a prediction of an increased
pace of deals, as measured by the absolute
number of deals completed in the market, our
tea leaves clearly indicate at least a sustained
level of M&A activity for some time to come.
We continue to receive numerous inquiries
from potential sellers wishing to discuss the pros
and cons of selling in the current market. They
want to know about their timing in the cycle, the
factors buyers seek in acquisition targets, and
the likely valuation of their business. These
types of conversations may precede an actual
foray into the market by several months or a
year or more. The heat of the current market is
helping shorten that inquiry period, but it takes
time for an entrepreneur to arrive at such a
weighty decision. Once a sale begins, a number
of months are required to prepare the sale
documents, approach potential buyers, negotiate
the transaction, perform final due diligence, and
close the acquisition.
Given the length of time needed to
consummate a transaction and the fact that sale
processes typically span two or more quarters,
we do not typically see deals being clustered
near the ends of quarters. As the end of a year
approaches, there is some pressure to get a dealdone before the New Year to capture certain tax
benefits. However, these are typically not large
enough for a seller to withdraw from a sale
process or a buyer to wield undue leverage in a
standard sale situation.
Another factor that can affect the pace of a
sale process is the dynamic of the ownership
group. Some buyers hesitate to pursue the
acquisition of a company in which the equity is
distributed across too broad a group of owners.
The fear is that completing the deal will require
consensus among a group who may not have
had a direct say in many issues in the past. They
may not be used to compromising with one
another or reaching agreement on sensitive
issues like the valuation of the business. The
same issue exists for an Employee Stock
Ownership Plan (ESOP)-owned company.
A broad ownership group does not always
spell trouble, though. The primary selling owner
should plan to demonstrate early in the process
that there exists strong consensus among the
owners to seek a sale of the business. For
ESOPs, it is critical to ensure that the trustee of
the ESOP is focused on achieving a strong
return for the employees and doesn’t have any
inherent bias against a sale of the company.
These potential sellers are spread from
Maine to California and everywhere in
between. One region may be fully recovered
and have exceeded its pre-recession housing
activity levels. Other regions may be attractive
because they exhibit solid fundamentals and
have a strong outlook. Every region of the U.S.
has its own story to tell with respect to the
recovery in housing.