3. Third—while M&A activity has been robust, are still fewer sellers than buyers. High demand for deals with low supply has resulted in a period of high valuations relative to historic norms. As an example, businesses sometimes sell for a “multiple” of EBITDA (earnings before interest, taxes, depreciation and amortization).
So, if your company has $20 million of EBITDA, today’s M&A environment may allow you to achieve a factor of 6x on those earnings, making your company worth $120 million, whereas historically—your company may have only garnered 5x or $100 million. Think about it: let’s say the same company decides to wait and sell in two years. Company EBITDA has grown to $24 million, but multiples have also come down to 5x. This hypothetical company put in two years more of work (and risk), growing earnings by 10% per year, only to get the same amount of money in a sale.
4. The fourth has to do with being opportunistic: We need to consider how long it will be before the stars align again as they are aligned today. The last time we had a very favorable market for M&A activity was before the housing recession, seven or eight years ago. It’s no secret that owners of many LBM companies are up in age. It could be in the 2020s before we see another window of opportunity like we’re seeing today.
Finally, trying to time the market by waiting is a fool’s errand. In 2007 and 2008, there were scores of dealers who had offer letters rescinded when the housing market started to turn sour. These sellers had waited too long, trying to time the crest of the market, only to be left empty handed.
Strike while the iron is hot…and it’s white hot right now.