If you’re a small business owner looking to recap or sell your business in the next 12 – 24 months, things may be looking up for you.  Strategic Advisors in Pittsburgh has put together a nice recap of the current state of middle market transactions.  Here are some highlights:

Middle market deal leverage averaged 3.3x EBITDA in 2009.  This is compared to 4.7x in 2008 and 5.6x in 2007.  Obviously a HUGE percentage decline but not bad considering . . .

Deal valuations averaged 6.1x EBITDA in Q4 2009 compared with 5.9x and 4.9x in Q3 and Q2 respectively.  Clearly an improvement but remember, only really good deals are getting done at these multiples.

Private equity deal flow decreased significantly in 2009.  PEF’s did $43 billion worth of deals in 2009 compared to $200 billion in 2008 and $575 billion in 2007.

Companies with weakened cash flow but with strong assets (AR, Inventory, and fixed assets) have been switching to asset-based loans and away from traditional bank financing.

Banks continue to hold onto their money.  Senior debt in a typical deal averaged only 2.7x EBITDA in 2009.  Sub-debt lenders and owner financing are filling the gap between senior + equity in a typical deal.

Read some of our posts on how to prepare your company and valuation if you’re thinking about making a move in the next 12 – 24 months.

It’s easy to get wrapped up in the day-to-day operations of your business.  It’s also imperative that you take a step back now and again and take an informed and critical view of what your business might look like to someone from the outside.  What would you do that for?

The decisions you make will eventually impact the valuation of your business one way or another.  Consider how you make decisions around the following strategic areas . . .

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That's the $64 dollar question and we've been asked it by business owners for over 25 years. Frankly if we could answer it, we'd already be sitting on a beach somewhere enjoying the sun and relaxing.

So, the honest answer is, "We don't know when you should sell your business." But, we do know that there are three things that you must be aware of and that must be in alignment to drive the highest value for your business:

1. Your intention to sell or "Owner Motivation"
2. Your business' performance or "EBITDA"
3. Your ability to find multiple, qualified buyers or "Market Performance".

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You know everything about your business or so every business owner assumes.  Many experience a rude awakening, however, when they attempt to sell or recapitalize their business and the buyer begins the due diligence process.  The bad news is that you can't avoid the due diligence process if you ever intend to sell or recapitlize your business.  However, you can predict how buyers will generally approach the process of due diligence and prepare for it.  Here are things that are important to all buyers we've ever encountered and questions that you will be asked:

1. How much cash does the company generate? Buyers want to know how much free cash flow your business generates. They’ll want a reasonable salary for the business’s CEO, as well as enough additional free cash flow to pay for the business over five to seven years.
   
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Think your business is successful because you’re financially profitable? Think again. Your firm’s success isn’t complete until you’ve found a way to get those profits out.

Selling the business to investors is one way to do that. But there are other ways to exit a company, and you should consider them all before deciding that a sale is right for you and your firm. Here are five exit strategies available to most entrepreneurs:

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It's generally hard to find good financial data about small business.  It's even harder to find good data about small business merger and acquisitions trends.  What we try to do for the CFP Blog is find articles about trends impacting larger businesses yet mirror what we're seeing for small business.  We came across this article in Business Week that gives us some insights as to what we believe 2010 has in store for small business M&A.

In a nutshell, we expect small business M&A to go sideways for most of 2010.  Some deals will get done but for the most part, buyers and sellers will have to reconcile some differences before we return to more normal deal activity.

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A lot has been written and said about the tightness in the credit markets that many small businesses across the country are experiencing.  But we've wondered how the credit markets are affecting small business deals.  More specfically read this post as "what do I need to think about if I sell or recapitalize my business in the next 6 - 14 months."

We came across an excellent article describing what is happening in deals that are currently getting done.  Needless to say, we found article the from the TheFreeLibrary.com very interesting.

The first thing to keep in mind is that deal volume is down significantly:

In the twelve months ended July 31, 2009, the aggregate volume of U.S. public M&A fell 61% from the same period in 2007, to approximately $432.5 billion, with private equity activity declining 98%, to $10.7 billion. Pending transactions were tested by financing failures, underperformance and litigation, and negotiating parties were forced to reconsider transaction terms in the context of general economic uncertainty.

The last sentence is telling and sets the tone for the rest of the article.

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Different buyers have different objectives and levels of experience. Understanding these differences can help you in getting the kind of deal you want. As you begin discussions with potential buyers, it's important to keep in mind that buyer’s goals and objectives vary greatly. In general, buyers can be classified into three groups:

• strategic buyers (public and private industry competitors) 
• private equity groups
• individual or “angel” investors

The valuation you get for your company will vary based on the type of buyer:

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