Frothy valuations in public equity markets are turning more investors to private markets for returns, and there are lots of opportunities to be had, if you know where to look.
According to Export Development Canada, small and medium-sized enterprises (SMEs, or businesses with under $50 million in annual revenue) make up about 98% of Canada’s businesses and account for 30% of GDP and more than 70% of all jobs.
Not only are private companies the driving force of our economy, but investing in one can also provide higher returns in a realm that doesn’t require the governance, rigour and cost structure of a public company.
If you already have an operating company, acquiring one can help scale your business, far beyond what’s achievable through organic growth.
The robust North American deal market has been setting records for both deal volume and values. Here in Western Canada, more than 300 mid-market private company deals took place in 2017. Of those, 181 were transactions involving a B.C.-based target company. And in 2018, regional deal numbers are already upwards of 200 – with 119 of those involving B.C.-based companies.
Whether buyers are looking to buy for strategic or financial reasons, the question I’m often asked is: how do I get tapped in?
Here’s some advice on how to find out what opportunities exist, getting connected into the deal-making community and what to be ready for.
Understand your value proposition
Think about what you bring to the table and, more importantly, how you’ll differentiate yourself from other buyers.
Also, what’s your planned hold period? Do you intend on buying the business and holding it for a long time (maybe indefinitely)?
Your planned approach to financing is another big one.
Know what you’re looking for before you find it
Spend some time developing a clear understanding of your target investment; think about characteristics like geography, size and industry. When it comes to sourcing deal flow from advisers, generalists who want to “see everything” tend to be treated with skepticism. This will also help ensure you’re not wasting time analyzing a business that’s not the right fit.
Find the right sell-side M&A advisers
For the well-marketed opportunities, the owner selling the business will have a sell-side adviser. In order to access these opportunities, it’s critical to get connected with the adviser community.
Deal size can guide you to which advisers to tap into. Many will have an industry focus as well.
Consider becoming a member of the community
ACG BC (the local chapter for the Association for Corporate Growth) is the predominant organization for the mid-market, private mergers and acquisitions (M&A) community. Members consist of advisers, accountants, lawyers and bankers – all of whom are focused on M&A. The association is very active, with monthly luncheons and events throughout the year. Most of these events have a significant networking component that is a great way to ensure you are meeting the right people and accessing the right opportunities.
Be patient and be prepared to pay fair value
I have met with many entrepreneurial buyers who want to acquire a business with low capital expenditure, stable cash flow, great growth opportunities and a solid management team for four times EBITDA (earnings before interest, taxes, depreciation and amortization) or less. My message is always the same: it isn’t going to happen. There are great opportunities out there, but they will attract interest, and they will transact at fair value. And it can take months if not years to find an opportunity that you are able to close. Taking a longer-term perspective is critical to success.
There are opportunities across B.C.’s diverse industry lineup, but they won’t fall into your lap. Finding the right acquisition opportunity requires planning and meaningful engagement with those in the know. By checking off these precursors to deal-making, you’ll be well positioned to find growth through M&A. •