Financing for baby-boom buys aboundsMid-market financiers exploit window of opportunity for business buyers and sellers as economy stabilizes – for now
In the midst of persistent European debt fears and scandal over the rigging of London's benchmark interbank lending rate last summer, Byron Bolton was on one of his company-built fishing boats 12 miles off the west coast of Vancouver Island.
With his BlackBerry in hand, he made the biggest deal of his career that would catapult his family-owned company into one of North America's largest recreational boat manufacturers.
Bolton's WestWinn Group – which designs and builds heavy-gauge aluminum sports-fishing boats under the Kingfisher and Habercraft brands – officially acquired Washington state's Renaissance Marine Group (RMG) in September. With financing from BMO and BDC Subordinate Financing, the $10 million deal nearly doubled WestWinn's size and North American market share. The deal, which has helped WestWinn grow to one of the five largest sports-fishing boat manufacturers on the continent, marks a new era in growth for the company, following a string of pre-recession acquisitions. Expansion was put on hold in 2008 when U.S. boat sales dropped 50% after being battered by the U.S. financial crisis.
But four years later, WestWinn and RMG were still strong competitors, and with boat sales and the U.S. economy finally edging up, the timing seemed right for RMG's owners, who were in their early 60s, to sell and get good value for the company.
"They had a solid business and weren't about to sell it at a discounted value," recalled Bolton. "However, as we were coming out of the downturn, we were able to pay them a fair value, but not the premium we would have had to in 2007, 2008."
Business succession wave growing
Bolton is like many small and medium-sized (SME) business owners succeeding the baby-boomer generation who are seeing an increasing number of opportunities to grow through acquisition over the next decade as more boomers retire.
While the trend has been on the radar of financiers and advisers for years, the wave of business succession is expected to accelerate over the next decade, according to a Canadian Federation of Independent Business (CFIB) survey released in November.
The report noted that 77% of SME owners plan to exit their businesses in the next 10 years and 48% expect to sell in the next five years (see chart). More than eight in 10 respondents cited retirement as the reason.
Axel Christensen, B.C. and Yukon managing director for BDC Subordinate Financing, is already noticing the trend taking shape in his business. Last year, nine out of the dozen financing deals his company closed were related to succession. That's up from four out of 12 in 2011.
Assuming the global economy doesn't face another major setback like 2008's financial crisis, Christensen expects the succession trend to continue and even grow, especially since deal activity and succession stalled a few years ago.
"Before the crash, people were holding on because they were doing well back then. It's hard to walk away from a money cow," said Christensen. "But then people went through a downturn, so everyone just went to the sidelines. But things have stabilized for now, so they're seeing a window of opportunity to exit. We're seeing the trend continue over the course of the year."
Niche B.C. businesses executing expansion plans
At the same time, although the general economic climate is muted, many of B.C.'s SMEs are looking for financing to grow.
Dave Mullen, managing partner at Vancouver's Fulcrum Capital Partners, said most of the deals the firm was involved in across the country last year involved providing expansion capital.
"I hope it's a sign we're getting into an expansion phase of the economy," said Mullen. "If you went back two years ago, we didn't have this level of expansion activity. I think it's a reasonable precursor that the economy is growing at a reasonable pace in Canada."
Robert Napoli, vice-president at Langley's First West Capital, closed 17 financing deals last year. Six were related to business expansion.
Some of the significant growth-related deals included financing to fund:
•Vancouver-based Crossworks Manufacturing's expansion of its cutting and polishing operations in Sudbury to process raw diamonds from the De Beers' Victor mine in northeastern Ontario;
•the securing of a larger volume of organic, green arabica coffee beans by Vancouver's Doi Chaang Coffee Company; and
•Calgary-based Sealweld Corp.'s expansion of its oil and gas service business in Canada and the Middle East.
With economic prospects stabilizing, Napoli is optimistic about the coming year.
"It should be a good year, barring a major catastrophe in Europe. That's the only thing that concerns me. I think the U.S. is improving, and we're seeing more demand in the U.S. for Canadian products."
Boomers: sell while you can
Long-time business owners looking to exit will likely have an easier time to finding a buyer sooner rather than later.
Mullen said that, with a lot of corporate cash still waiting to be invested, the number of businesses planning to expand through acquisition is increasing.
Added Napoli, "Whatever deal we're looking at, or ones that get some publicity, there seems to be multiple bids on deals.
"With good companies coming onto the market, and the abundance of capital, we're seeing a lot more foreign buyers, particularly from the U.S. and from Europe and Asia."
For now, with low interest rates persisting and the amount of capital looking to be invested from both private equity firms and strategic corporate buyers, sellers are likely to see a more aggressive and competitive environment from potential buyers.
But that's likely to change as more baby-boomers sell and capital and financing become less abundant.
"It's not a bad time to be selling your business now," said Christensen. "There's not a flood of companies on the market yet, so buyers are at the mercy of the seller. Sellers have the upper hand in the negotiating dynamic now, but we know at some point that's going to change materially. All the forces that suggest it's a good time to sell now may not be there longer term." •