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.