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.

Reconciliation

What do buyers and sellers have to reconcile?  For staters, valuation:

The value gap between buyers and sellers stems from sellers' inclination to price assets based on the full recovery they expect by 2012, rather than on current conditions, and buyers' refusal to overpay for them . . . The gap could be up to two times the target company's most recent 12 months' earnings before income taxes, depreciation, and amortization, or Ebitda

What does that valuation gap mean for you?  Say your adjusted EBITDA is $1,250,000.  A 2x valuation gap means you think your business should be valued $2,500,000 higher than the buyer does.  Depending on the situation, the gap could be even higher.  That's a pretty big spread to reconcile.

Another thing that will need reconciliation is the due diligence process.  We wrote about "deal certainty" in this blog post and how new conditions to close (like financing) are impacting due diligence.  This article has another take on this issue because it sees a lot of deal activity coming from foreign buyers:

Prospective buyers are also spending greater time on due diligence—another factor likely to limit M&A volume this year. Cross-border transactions with joint-venture partners in emerging markets generally require more scrutiny because of how reliant U.S. companies will be on these companies. Henry Schein (HSIC), a distributor of health-care products and services, has set up partnerships in 25 countries, and each has required two to three years of due diligence,

2 - 3 years of due diligence?!?  If you've ever been thru a due diligence process you know that's just crazy talk.

So where's the good news?

Once the market figures these things out, deals can and will get done in 2010.  We believe what's important for you to keep in mind is who your competition will be in terms of companies for sale or looking to recap in 2010 will be.  For example:

. . . a pickup in momentum for M&A among private equity firms and other financial sponsors, who bring capital and expertise to deals but rarely manage the companies they buy. These firms are looking to sell businesses they have owned for several years, which generally performed well through 2009. They believe strategic buyers may currently value these assets much the way they would have valued them several years ago.

In other words, professional business owners are going to be looking to sell some businesses this year because strategic buyers are going to be closing the valuation gap.  The trick for you will be to find those strategic buyers and present your company as a more favorable asset relative to others on the market.

Will you be able to do that?  Good question.

Companies {stragegic buyers} have record amounts of cash and shares [to offer]. They have all the tools they need to make acquisitions. Despite the belief that there's a lot of pent-up demand for acquisitions, the latest data suggest otherwise. Year-to-date as of Jan. 27, 642 acquisitions worth a total of $31.69 billion had been announced by U.S. companies for target assets around the world, according to data research firm Dealogic. That's a 7% decline in volume, and a 67% drop in value, from 694 deals worth a total of $95.18 billion announced in the same period of 2009.

Strategic buyers have the tools to make deals happen.  Technincally, they should have the desire to make deals happen.  Now, all we can do is wait and see if that ability and desire turns into action.