Business acquisitions: What to expect in 2020

  • ERIC LUNDSTROM

    ERIC LUNDSTROM

 
Posted1/23/2020 1:00 AM

Calendar year 2019 was another extremely active year for middle market business sales. And another year of strong performance on the bottom line that led many business owners to explore the sale market while business is still strong. Those that sold in 2019 found very strong EBITDA multiples. with many buyers aggressively pursuing new acquisitions.

The job market remains tight as we head into 2020 which will be the biggest challenge facing local area business owners. Buyers have been undeterred by the labor challenge because there is so much money available from investment groups looking for quality returns and interest rates remain historically low. This allows buyers to pay a little more for a good business since the cost of capital is so reasonable. And the opportunity to acquire talent through a business acquisition is a very good strategy.

                                                                                                                                                                                                                       
 

The mindset of most private investors and corporate buyers indicates there is still room to grow even the most successful middle market business. Buyers spend a great deal of time looking into strategies to improve the businesses they invest in. This trend will continue in 2020 and we cannot see any reason to expect a slowdown in acquisition activity.

Early indications are President Donald Trump will be hard to beat in the next election cycle and therefore interest rates should remain low and income tax rates will also remain historically low. No matter the election results, 2020 should continue the attractive business environment we enjoy today. However, certain industries will suffer as a result of the tariff's being employed by the current administration. The tariff impact appears to have had the greatest impact on the consumer since almost all the price increases just flow to those of us buying the food, automobiles and plastic products.

The latest changes in the Chicago area banking environment have seen people movement, but most business owners have their debt under control and are not anxious to make a banking change. In addition, the number of non-bank lenders has increased dramatically. Private investors have become lenders in order to improve returns on capital and these non-bank lenders do not have the overhead of branch locations and government regulation. This combination of factors will keep the lending environment very competitive throughout 2020.

In 2011, a reported 10,000 people a day started turning 65 years old and that initial group is quickly approaching 75 years old. While many of us plan to continue working well past 65, the boomers that are entrepreneurs have worked hard to build a nice business and cannot work forever. Everyone wants to sell at the high point and 2019 and 2020 qualify as a high point for business valuations.

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A business sale is motivated by many factors including a chance to diversify personal assets and reduce the daily stress involved in finding new talent; among the many other challenges found in everyday leadership of a business.

The pool of investors looking for "private equity" investments has grown dramatically over the last several years and will do so again in 2020 leading to a strong demand for quality businesses to acquire. Transactions will take longer to complete in the years ahead as the due diligence requirements will remain extensive. And the ownership transition timeline has extended as the valuations have increased. Buyers want the present owner to stick around and in many cases the buyer wants the seller to retain some ownership to show confidence in the business. Obtaining a premium price for your business means the buyer will do an in depth investigation and analysis before the money changes hands.

So, the money chasing business acquisitions will be very active in 2020 during a strong era of business performance. This always leads to better prices for the sellers and better returns for the buyers. As long the politicians in Illinois stop making it difficult to do business in our state, but that is a topic for another article.

Happy New Year and all the best for a terrific 2020!

• Eric Lundstrom, CPA, is president of Focus Capital Advisors, Inc., in Downers Grove

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