Will there be a rash of business sales the rest of this year?

For the last few years, owners considering selling their business have faced a difficult environment.  The lack of credit availability forced most financial buyers to the sidelines, and bad economic conditions caused strategic buyers to conserve capital, and focus their efforts on cost cutting.   Compounding the problem, many potential sellers have seen the financial performance of their business flatten or decrease, causing valuations to decline.  The result:  owners interested in selling have been biding their time waiting for the environment to change.  In the meantime, these owners haven’t gotten younger; their offspring that didn’t want to – or couldn’t – run the business still don’t/can’t; and in many cases, their retirement accounts have shrunk and currently earn paltry returns.  The clock is ticking.

But if you listen to people in the business of making deals happen - lawyers, accountants, intermediaries, and strategic advisors  – the tide may be turning.  The debt markets have thawed which helps financial buyers get back in the game.  Strategic buyers seem to believe they have done enough cost cutting, and now they need to grow – and an acquisition is often the fastest way to fill a gap in their growth strategy.  

As for the supply of businesses to buy, there are forces at work there too.  Listen to what LKQ Corp . (LKQX ), a nationwide provider of aftermarket collision replacement products that has grown primarily through acquisition of privately held businesses, had to say in their recent earnings release Q & A session when asked about it:

“The acquisition environment is absolutely the strongest deal market we have seen…… And I would say we are overhearing two things in terms of seller motivation, one is certainly the lack of clarity of what capital gains rates are going to be in that sphere….But I think the other thing we are starting to hear …. the fact that the liquidity of many owner-operators - that’s really been choked and the owner operator who used to be able to borrow say $0.60 in the dollar on the basis of his inventory or inventory and receivables, now his bank says that’s about 20 or 25%…..”.

Much has been written about the coming expiration of the Bush tax cuts  at the end of 2010.  And although no one seems to know for sure what the tax rates will look like, everyone seems to be in agreement that taxes will go up.  Anecdotal evidence abounds that the threat of these tax increases is driving business owners to try to get deals done by year-end.  But the larger issue may be the “fatigue” that has set in as a result of running a business in this environment.  Sure the majority of businesses made it through the recession intact, but at what cost?  Layoffs, cash flow problems, and fights with stakeholders have left many business owners tired.  If you listen closely, a lot of them are saying, “…it just isn’t fun anymore”.

Our take on the rest of this year: there will be an increase in deal activity, but if a company hasn’t started the process by now, they will have a hard time getting a deal done in 2010.  Over time, we believe that transaction values adjust to market conditions – including seller tax rates -  so those owners really wanting to sell will do so no matter what happens with that variable.   

Based on the conversations that we are having with ready and willing buyers – and tired business owners,  the next 18 months could be very busy.