M&A - Investment Grade Advisory

Joseph Vinar 2, Jul, 2021

General

High Growth Rate but Low Valuation?

Many business owners would consider a company with a revenue growth rate of 40% exceptionally attractive. “Surely this is a well-founded business primed for a promising future. With a growth rate of 40%, this company will soon be a dominate player in their market.” But they’ve forgotten a key part of that equation, What’s the market’s growth rate? If the market is growing at 60%, this company is sprinting towards obsolescence as it hemorrhages market share.

However, on the flip side in the 2008-2010 recession when the markets were plummeting, we saw companies with negative growth rates receive all-time high valuations. They were gaining market share since the market was contracting faster than the company was. A company’s future cannot be summed up in a number as simple as growth rate but should be compared to its competitors’ growth rate.

Rather than only focusing on growth, business owners could benefit from benchmarking their growth rate relative to their market. Here are some ways to determine your market’s growth rate:

– Ask an industry association in your sector
– Read annual reports from public companies in your market
– Hire a local MBA student
– Have a internal analyst calculate it – here is a helpful article for calculating market grow rate

If you would like to discuss how this applies to your business, we would be happy to talk with you.

Schedule a meeting here:

Joseph Vinar 30, Jun, 2021

General

Home Services Businesses with Recurring Revenue Are More Valuable

Every business owner is asking, “What’s my company worth?” and “How do I increase its value?” As the adage goes, it’s worth whatever someone is willing to pay, so it’s helpful to view a company through the eyes of a potential buyer. Buyers pay for risk adjusted future cash flows. The two main ways to increase the value of your business are through increasing the future cash flows or by decreasing the risk associated with the cash flows.

Home services have traditionally received lower valuations due to riskiness of returns stemming from mostly one-time revenue. For example, a maintenance plumbing business does not know at the beginning of each month how many people will be calling with broken toilets and faucets. Perhaps a better plumber comes to town one month; suddenly a business that has been thriving for years could go under. The uncertainty of these revenues creates significant risks for investors.

Home services is strategically positioned to transition their operating models to generate recurring revenue. Recurring revenue is revenue coming from an ongoing contract or subscription. We’re seeing this with pest control companies which charge a monthly subscription fee for regular spraying. Plumbing companies are charging a fixed monthly rate for any plumbing issue to be rapidly resolved. These offerings provide peace of mind to the consumer and consistent cash flows to the business owner.

Transitioning revenue from one-time to recurring can significantly increase valuations. Even if an owner doesn’t want to sell their company for years, this shift towards recurring revenue meaningfully decreases risk and improves business fundamentals.

Duane Donner 24, Jun, 2021

General

Vibrant Mergers & Acquisitions Market Continues to Surge – June 2021

Optimism abounds in the 2021 M&A market, priming it for high activity. Companies, across all industries, are looking to grow as a result of increasing competition, record amounts of cash sitting on corporate balance sheets, and low interest rates. The demand for high-quality businesses is strong, and there has never been a better time to enter the market.

As the North American economy continued to rebound in Q1, so too did M&A activity with over 5,388 deals closing in the quarter. This was a 26% growth from Q1 2020. Additionally, there were 11,394 deals recorded globally in Q1.

The above chart represents M&A activity by value Q1 2020 – Q1 2021 for North America. The upward trend in volume is a direct reflection of the current, positive market conditions. The expectation is for this upward trend to continue throughout 2021.

In Q1 alone there were over 5,621 deals announced targeting companies in the U.S. and Canada. This was the second highest first quarter total this century. Currently, the North American M&A market makes up 53% of the world M&A market.

The Industrials sector undertook the most deals in 2021 with 939 deals. While the technology, media, and telecom industry led the way in terms of valuation at $204bn. With low interest rates and potential tax changes, pent up demand for acquisitions is surging this year.

Sources: S&P Global, White & Case, Pitchbook