Friday, August 24, 2018

Is M & A the Ebola Virus of Small Business?

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For the last two weeks, we have considered trends permeating the commercial property landscape. We deep dived into third-party logistics providers and discussed a move out of the state of California. 

Today’s topic will complete the trifecta of trends as we tackle the quest for business acquisitions.

My theory - if it happens once - it’s an exception. Twice - a trend. Three or more times - it’s an epidemic. Well, if my theory is true - the pace of mergers and acquisitions is the business equivalent of the Ebola virus!

In a typical week, I contact several dozen small business owners - folks who own and operate manufacturing, distribution and service companies. No kidding - one-quarter of these companies have recently sold, are in merger talks, or are seriously considering the purchase of a competitor. Wow! Contact the CDC and get those vaccinations ready!

So what gives? Why this rampant rush for the exits?

In my experience - the reasons are what follows.

Age of business owners. Let’s face it - we are an aging society. Doubt what I say? Take a look around your neighborhood. How many of your neighbors were born when Eisenhower was president? Yep. Now, give some thought to what your neighbors do for a living. Chances are they manage their own company. If the heir apparent is not living in their basement - and in line to take over - these small business owners face a dilemma. How much longer should I continue to own and operate this company? And, is another 2008 on the horizon. Survey says - “fewer than five years” - now is a perfect time to sell the business and watch Jeopardy re-runs in your PJs.

Time in the cycle. Much like activity in the commercial real estate market ebbs and flows – the motivation for company acquisitions follows a similar pattern. Operations are valued based upon a multiple of their earnings. The greater the multiple – the higher the value. Profitability has returned and we are seeing multiples at all-time highs - which translates into much more worth today than any time in the recent past.

Cheap money. Another factor which has rallied the ravenous appetite for business acquisition is the availability of capital. These dollars must find a home. In general, sought is a domicile with the highest return on investment. In many instances, this is best accomplished with a company purchase.

The impact upon commercial real estate. Housing all of these operations? Yessir - a suite of offices, an industrial building, or a retail storefront - AKA - commercial real estate. In every merger, acquisition, or disposition - the buildings in which the operations are located - must be analyzed, valued, consolidated, leased, sold, retained, or otherwise accommodated. 

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