The spring of 2015 was a rare point in time when the stars were aligned for M&A activity: active buyers with few sellers, more housing recovery ahead of us than behind, cheap and available debt, and high public market comparables. It was, without a doubt, great to sell your business in 2015. Unfortunately, those of you considering a sale/exit of your business in 2016 have a murkier situation on your hands.
Within the span of a month or two, right around the time summer had ended, the market shifted on us. What changed? Here were two significant differences:
- The credit markets tightened significantly. Perhaps spurred by the deteriorating situation in the energy sector, lenders began pulling in the reigns on how much debt was available for leveraged deals. The bottom line was/is—less leverage is available to put on deals, which translates into making deals harder to get financed for buyers and lower valuations for sellers.
- The BFS-ProBuild and BMC-Stock mega mergers of 2015 have created a period of integration and cost rationalization rather than being active acquirers as they were in prior years. It is extremely important for these mergers to work out, so our guess is the folks who run these businesses would rather spend their time focusing internally vs. externally (and rightfully so). This is pure conjecture on our end, but to us it just doesn’t make much sense for these acquirers to look at acquisitions when there is so much opportunity in integrating their existing platforms. If you take a look at the transaction activity from these firms, or lack thereof, this hunch is generally playing out.
As you think through the timing of your strategic options, appreciate the suddenness of this shift in market dynamics. The takeaway: It is impossible to time the market. Had you called us anytime in the first half of the year, we were pounding the table for sellers to take advantage of what was a great deal environment. By the time September came, we were characterizing the market conditions as a still good but not perfect market for sellers and giving lower valuation estimates. Other notes from inside the firm to consider as you plan for 2016:
- It is a better time to be selling a specialty business in LBM (drywall, roofing and siding, exteriors, hardware, etc.) than a lumberyard.
- For lumberyards who need to sell in 2016, we’re advising clients to wait until mid-2016 to hit the market; a time when hopefully all of the strategic buyers will be back in buying mode.
- Low lumber and panel commodity pricing continues to hurt earnings and subsequently impact valuations.
- Independent buyers of lumberyards currently have an open window of opportunity to acquire businesses at lower valuations with little-to-no competition in certain markets.
- “Fit” with buyers will play a large role in preserving, or even enhancing, valuation.
- As the large acquirers get bigger, it will become harder and harder to get their attention as a seller.
- As more LBM acquirers become publicly traded businesses, expect more volatility in the deal process as managers of these businesses become subject to the ebbs and flows of public markets and quarterly earnings pressures.
The window remains open for sellers, and yes, it is still a good time to consider transacting. Valuations remain above average historically, but your specific situation is going to dictate whether or not now is the right time to transact. Expect more independents to be consolidated. We believe the window to sell your business will remain open into 2017. Those looking to sell in this cycle should begin preparing now as the transaction process can take 6-12 months.
2016 Financing Outlook
We are in a very different place than where we were a year ago. Base rates are higher, credit standards are stricter, and pricing for high-risk or leveraged profiles is at a premium. While middle market terms tend to be less volatile, the potential for tighter leverage and higher pricing metrics is high. In this environment, we are advocating refinancing as soon as possible if your current deal is close to expiring. Expect a more conservative outlook from your lender on deals, and for those of you who haven’t already—getting to know the asset-based lenders (ABL) may prove worthwhile. The ABL product (although more expensive) is probably the right product for building products distributors anyhow, and they will be more receptive to riskier situations like acquisitions than a traditional bank.