BC businesses continue to be bought and sold despite the overhang of global economic uncertainty that?s plagued much of 2011.
That was one of the key messages at this year?s financing forum organized by the Institute of Chartered Accountants of B.C.
?Deals are definitely getting done,? said Kristi Miller, vice-president at First West Capital. ?Capital is not a constraint.?
She noted that in the past year, the $60 million subordinated debt and mezzanine fund she co-manages with Robert Napoli, has completed 10 financing deals, six of which were involved in local M&A deals.
BMO commercial banking manager JJ Kozak said, ?We?re in a position where there is nothing but money out there.?
Terry Holland, president and CEO of private equity firm Krystal Financial noted that B.C. remains insulated from the uncertainty going on around the world, buffered by a strong national financial system and ?tons of great companies out there. We have all the ingredients to get transactions done.?
Within the last two months alone at least a dozen M&A deals have either been announced or closed that involved B.C. companies. The latest was Silver Predator Corp?s (TSX:SPD) announcement last week that the company had entered a letter of intent last week to acquire all the outstanding shares of Nevgold Resource Corp. (TSX-V:NDG).
Other significant deals since September include:
?AltaGas? $230 million acquisition of Pacific Northern Gas (TSX:PNG);
?Glacier Media?s (TSX:GVC) $86.5 million acquisition of the Victoria Times Colonist and B.C. community newspapers owned by Postmedia Network Inc. (TSX:PNC.B); and
?Tricor Pacific Capital?s $40 million investment into Avison Young.
Industry insiders noted that the M&A market has not become as aggressive as in 2007, when target companies were sold in an auction environment and acquired by the highest bidder. But the interest of potential purchasers remains very strong in B.C.
The robustness of the market is partially due to continued interest from eager U.S. buyers. Jim Crooks, vice-president of PwC?s corporate finance group, said American private-equity firms continue to scout for deals in Western Canada given the relative strength of the region?s economy. ?It throws another element of competition,? he said.
However, interest by management to buy out the owner of a local business remains a key source of M&A deals in addition to the growing wave of business sales from baby boomer entrepreneurs who are looking to retire.
Buyers and financiers remain cautious in strong environment
Despite the market?s relative strength, buyers and bankers remain vigilant in ensuring that deals don?t turn sour after the seller signs on the dotted line. Industry experts noted that in-depth scrutiny remains strong and the risk tolerance remains lower than in the heydays prior to 2008?s financial crisis.
Crooks noted, ?There are more restrictions, financial covenants. Banks are more cautious. The timing of deals seems to be quite a bit longer.?
Given the increased due diligence involved in selling a company, advisers suggested sellers should be aware of the large amount of preparation and paperwork needed to get the business ready for sale.
Given the added scrutiny, it?s essential that a company?s financials be assembled in a standard, cohesive package that helps potential buyers evaluate the strengths and weaknesses of a company.
Vic Tyson, vice-president at RBC Financial Group, noted, ?A couple common mistakes we see is the quality of information being presented not having the substance and detail that we?re expecting. It?s an acid test for us. The other is over-aggressive forecasting and an under-appreciation of how long it can take to drag a sale across the finish line.?
A 2011 Deloitte private equity report noted that most business owners generally don?t know the key drivers to their business? underlying value, even though it?s one of the keys to getting the highest sale value of a business.
The Deloitte report suggested for business owners and management to gain maximum value, they should:
?have a concrete financial goal and have a plan to achieve it;
?see the company as a platform for growth, either as a foundation to grow through acquisition, or as a potential acquisition target;
?know the company?s key performance indicators;
?honestly assess its strengths and weaknesses and know how to fill any talent gaps; and
?be very mindful of a company?s cash flow and be disciplined with capital expenditures and the balance sheet.
Having an adviser to help with these details is helpful, not only in running the business, but especially in preparing it for sale.
Miller noted: ?There are two parts to a deal. One is the wedding ceremony and the other is the marriage. The transaction is the wedding, but from a lending perspective, it?s a marriage. One of the things we look for is the network of advisory relationships, the legal, accounting. People who seek out advice, and quality advice speaks to partnership, which is important.
?Almost half the time, our investees come back for more financing at the end of the term. They want to grow the business, not just own it.? ?
