In October, Silicon Valley entrepreneur Eric Bahn sold Beat The GMAT, his social network startup for MBA applicants, to Hobsons, an education technology company in Cincinnati. The money, he says, was “too good for us to pass up.” Timing was also a big factor: The sale closed before a raft of tax increases stemming from Obamacare and the fiscal-cliff deal kicked in on high earners in 2013. “Some others in the Valley are wallowing a bit in their alcoholic beverages right now, feeling like they missed a good time for liquidity,” Bahn says.
Bahn’s interest in getting the acquisition completed in 2012 appears to have been shared by many: BizBuySell, an online business-for-sale marketplace focused on Main Street companies, reported a 43.4 percent jump in business sales during the final three weeks of December 2012 compared with the same time period in 2011. Its report records a sample of transactions reported by 1,200 brokers across the country. “We had a daily average of 12.7 deals for the first 10 weeks of the fourth quarter. It spiked to 16.3 over the last three weeks, showing a very pronounced, consistent increase,” says Curtis Kroeker, the company’s general manager. (Disclosure: BizBuySell advertises its listings on Businessweek.com.)
Mergermarket, which tracks mergers and acquisitions globally, reported $672.9 billion worth of deals in the U.S. in the fourth quarter, up 45.6 percent over the same time period in 2011 and the best quarterly result since 2010′s fourth quarter. “I was very happy to see that, because when we do have that uptick at the year’s end, it really shows the next year is going to be a good year,” says Amanda Levin, who oversees the company’s M&A research in North America. “We’re not going back to 2007, but it’s a lot better than recently.”
Clearly the impending tax increase was a major driver of late-year 2012 sales, but other factors are coalescing around an improving M&A market: aging boomers looking to retire; large companies that have amassed considerable cash reserves since the fiscal crisis; and laid-off employees approaching middle age, who are turning to entrepreneurship rather than trying to find full-time employment.
Small business valuations will also improve this year, if only due to a quirk of timing, says Scott M. Bushkie, principal at M&A advisory firm Cornerstone Business Services in Green Bay, Wis. “Most buyers go back three years in scrutinizing a company’s financials,” Bushkie says. “This year for the first time in a while, 2009 will not be included, and 2009 was a very bad year for most businesses. The seller’s story looks a little bit better now.”
In some sectors, including construction and manufacturing, acquisitions are motivated in part by the desire to acquire proven employees. The trend has been around for a while in a technology sector hungry for software engineers, but it is spreading, says Roger J. Murphy, president and chief executive of Murphy Business & Financial, a Clearwater (Fla.) business brokerage. “In Florida about 90 percent of all the construction-related workers were out of work because of the industry decline” stemming from the implosion of the mortgage industry and housing bubble, he says. “The guys working down here relocated out of state or got retrained. Now, if you’re doing a building and you need a sheetrock contractor, you just can’t find the labor.”
The solution for some midsize business owners is to buy small competitors and incorporate their technology and skilled workers. “We had a printing company client who couldn’t find good pressmen, so he bought a couple small companies that were going under,” Murphy says. “Those employees are now working 40 to 60 hours a week, where they were only getting 20 hours a week before.”
Diane Biersteker, who started Human Resources Consulting in Little Suamico, Wis., two years ago to advise small-to-midsize companies, says many of her clients are looking at targeted acquisitions mainly for the skilled labor. “The craftsman is incredibly important, and it’s a big pain point for the machine shops and manufacturers I consult with,” she says.
Bahn and seven of his employees from Beat the GMAT stayed on after the acquisition and now work in Hobsons’ Web properties group in San Francisco. When his friends complain about their tax troubles, he tells them they’re “facing a first-world problem. You have to pay a little more taxes, but that’s because you were successful and made a lot of money.”