More than half of business owners expect to make a significant, “transformational” change for their companies in the next three years, and 63 percent are without an exit strategy.
That’s according to a new report done by U.S. Trust, Bank of America’s private wealth-management division, which was the topic of discussion at a forum on merger and acquisitions in the middle market held earlier this month at the Wannamoisett Country Club in East Providence.
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Transitions that 54 percent of business owners cited in the report are considering include significant changes such as retiring or raising capital for growth. While the report didn’t say how many of those in transition had a plan for the change, it did find that baby boomers were the least likely among all respondents to a survey of 684 individuals with at least $3 million in investable assets to have an exit plan. Millennials were the most likely to have exit strategies.
William F. Hatfield, market executive of U.S. Trust and Rhode Island market president for Bank of America, along with Michael Sweeney, senior managing partner of Duffy & Sweeney Ltd., and Bill Peluchiwski, senior managing director of Houlihan Lokey, broke down recent trends in the middle market, which Sweeney defined as all businesses with annual revenue totaling between $10 million and $1 billion.
The forum discussion largely revolved around succession, equity and timing.
Sweeney’s Providence-based law firm advises public and private companies on mergers and acquisitions. He says Rhode Island and the entire New England market right now is well-positioned for a greater amount of middle-market merger and acquisition activity, especially because of the amount of capital available in both private equity and corporate cash.
Sweeney says he’s worked on about 100 deals in the last decade, and his firm has worked with companies that include Gencorp Insurance Group, Washington Trust Bancorp, NuLabel Technologies, Atrion and more.
The number of transactions slowed after the financial crisis of 2008 and subsequent Great Recession, which Sweeney says put plans on hold for a number of companies considering transition.
“If you were thinking of an exit in the 2007 to 2008 time frame, there was a significant loss of enterprise value,” Sweeney said.
Peluchiwski, whose Los Angeles-based global investment firm specializes in mergers and acquisitions, says Rhode Island in the past couple decades has seen an exodus of business. But that’s not necessarily a negative attribute from the perspective of competitive private-equity firms in search of companies with high value, low debt and excess cash.
“What’s left here is actually better-quality businesses than what was here 20 years ago,” he said.
Private-equity sponsors in 2016 have near-record amounts of capital – often referred to as “dry powder” – to invest, according to the forum members. But access to capital is not the only thing weighing heavily on the minds of middle-market business owners.
Indeed, there were 330 middle-market U.S. transactions closed in the first quarter of 2016, which is the lowest amount for any period since the first quarter of 2009, according to data compiled by Thomson Reuters. At the same time, the deal value for those transactions totaled $59.4 million, marking the lowest level since the first quarter of 2012. Rhode Island numbers were not immediately available, but forum members said the macro trends don’t alter greatly region to region.
The reason behind this decrease is because of a number of market factors, including those outside of the control of business owners. A U.S. Trust survey of 684 individuals with at least $3 million in investable assets shows that 66 percent of business owners are very or somewhat concerned about the outcome of the 2016 presidential election, marking the No. 1 concern among survey respondents.
The concern grew among the millennial and Generation X groups – 75 percent –compared with baby boomers and those older than 71, totaling 59 percent.
“The political environment, we know, is very charged, very divisive, and is causing people to step back right now and say, ‘What’s going on with the world economy,’ ” said Hatfield.
Another factor is the volatility in equity markets seen earlier this year, according to Sweeney, who says it’s had a cooling effect on the upper-tier of middle-market companies, more so than middle-market companies valued between $20 million and $100 million. The latter, he says, are better positioned right now for transitions.
“If you’re thinking of the transition … this is a good time to look at it,” he said. “The market right now is flush with capital.” •
