Calder Capital/SBDA Quarterly Market Pulse

Hear from our advisors what the Q1 2021 M&A market looked like from a boots-on-the-ground perspective.


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As we’re headed into the second quarter of our second year of the COVID-19 pandemic, let’s reflect back on some of the patterns of Q1 in the Mergers and Acquisitions market. 

Overall, 2021 looks strong going forward. Transactions for our first quarter have declined a bit from Q1 of 2020, which was immediately pre-pandemic, however, the aggregate value of our 2021 transactions were significantly larger causing us to have a record Q1 in terms of sales. As far as we can see, the slight decline is not due to buyer demand or available capital, which is at a record high–but rather, supply has slowed a bit as sellers wait out the market while they try to rebuild valuation. Not surprisingly, at Calder we’ve noticed that buy-side M&A has especially taken off vs this time last year. 

“The economy and environment is becoming energized at the thought of an end to COVID with the vaccines coming out,” raves Garrett Monroe, Mergers & Acquisitions Advisors (MAA) at Calder Capital.

The general consensus is that the market is “frothy,” and flush with capital, but perhaps low on quality sellers. According to Rick Purcey, MAA at Calder, “While obtaining new engagements appears to be slower than usual, buyer interest remains strong if it’s the right type of business.”

Calder Capital MAA Pankaj Rajadhyaksha observes, “It can be a challenging time to be a seller unless you have had a great year or you’re willing to make a compromise on price and/or structure.” 

However, this doesn’t mean the market isn’t favorable for sellers. In fact, especially for those companies that had a strong year and whose owners might be looking to retire in the not too distant future, now might be an excellent time to sell in light of prospective upcoming tax changes, as well as a few other considerations.

Companies Sold Q1 2021: 11 vs 14 in Q1 2020

Breakdown of Industries for Sold Engagements  
Construction 4
Service 4
Manufacturing 1
Distribution 1
Restaurant 1
Locations of Sales  
West Michigan 6
Out-State Michigan 2
Indiana 1
Idaho 1
Texas 1
Q1 2021 New Clients  
Calder Capital Sell-Side 10
Calder Capital Buy-Side 4
Small Business Deal Advisors Sell-Side 16

Shifts in Valuation Multiples and Deal Structures

While buyer demand is high, we’re reaching a point where this gets a little more complicated. Many buyers are still hoping for a discount, and would prefer to seek out acquisitions of businesses that are only maintaining pre-COVID performance, or even ones that took a hit during the pandemic. However, most owners of businesses who have a lower valuation as a direct result of the pandemic year would prefer to sit out the market while they build valuation.

“I’ve sensed a greater gap in valuation opinion between sellers and buyers,” says Sam Scharich, M&A Advisor and Director of Business Development at Calder Capital. “Business owners that did well through 2020 and into 2021 want a premium for surviving the pandemic. Lots of buyer demand has pushed multiples up for select quality opportunities. Some buyers are frustrated because they’re not willing to pay a premium, and they end up losing the deal.” 

The demand seems to be oscillating on either side of a wide spectrum. A lot of buyers want to acquire distressed companies in order to save capital and make a quick return on investment as the economy recovers, while many others have high amounts of capital and are eager to cash in on companies that have thrived through the pandemic–though the latter seems to be slowing down in terms of buyers being eager to pay a high premium. However, on both sides of the spectrum supply is still staying low. Owners of profitable companies aren’t too eager to sell, and owners of struggling companies that have hope of recovery would prefer to sit tight rather than selling.

“Clearly 2020 and Q1 2021 saw a large number of proposals in which a substantial portion of the purchase price was in the form of earnouts,” noted Pankaj Rajadhyaksha. “ The primary reason for this shift was the decline in performance of many companies in 2020. Sellers have been reluctant to embrace this structure and buyers have been reluctant to make large upfront payments since the economic outlook has been uncertain.

Pandemic-Popular Businesses in High Demand

We asked our advisors about which of their on-market businesses have gotten the most attention from buyers, and which ones have seemed to struggle in the current market. While we can’t disclose any information about specific on-market companies, we can identify a few trends, which are definitely consistent with Bizbuysell’s Insight Report.

Pandemic-proof businesses are still in high demand among buyers.

Overall, companies that excelled in profitability over the course of the pandemic received the highest demand–especially in the home remodel industry and technology related services industry. 

PPP Loans Complicating Transactions 

An additional trend with 2021 Q1 acquisitions is that the Paycheck Protection Program loan is causing some delays in due diligence processes and loan approval. Changes of ownership for companies with an outstanding PPP loan have to receive SBA approval.

According to Sam Scharich, lenders for M&A transactions tend to be scrutinous when it comes to add-backs, and are extra attentive to PPP loans and 2021 YTD financials. “Transactions have been slow moving,” commented Scharich, “especially when dealing with PPP. Underwriting has clamped down at some banks.”

However, perhaps lenders could help along the process by being a bit more straightforward and telling it like it is. Advice to lenders from Garrett Monroe, M&A Advisor at Calder Capital: “Do not wait until the deal is near the underwriting finish line to decline moving forward. Either you like the deal or you don’t. Let’s nip it in the bud early on in the process.”

Increased Caution on Both Buy-Side and Sell-Side

After such a tumultuous year, sellers are understandably more cautious than ever. It’s essential that buyers take the time to forge a relationship with the business owner they’re buying from, and build trust. 

“Don’t play games,” Scharich advises buyers. “You lose credibility quickly if you say and then do different things. An honest and open conversation is likely to get you favor in the seller’s eyes, build trust, and give you the best chance at finding what the seller is going to need to walk. On one of my deals, the individual buyer was able to beat out the strategic buyer because he met face-to-face with the seller and sold himself and built trust.”

Two components that are especially important in times of economic uncertainty: building trusting relationships, and management of expectations.

While plenty of buyers are just as bold and aggressive as usual, it’s not as if the buyer population has been completely impervious to pandemic impact, and we are seeing some skittishness on this side, as well.

“For most buyers,” remarks Pankaj Rajadhyashka,  “it has been the uncertainty of the economy. They are either unwilling to pull the trigger or to be aggressive in their approach. [To buyers], while nothing is certain, if you have a vision for a company and your abilities, it might pay off in the long run to be more aggressive in your acquisition strategy right now and be prepared to provide more cash equity.”

Of course, some advisors, such as Rick Purcey of Calder Capital, have not noticed an unusual amount of anxiety on the part of buyers, but rather just the typical uncertainties associated with a business acquisition. “I have not experienced any unique buyer concerns beyond the general theme of continuity of operations upon owner exiting and possible employee morale/turnover,” says Rick. “As a general rule, we just don’t see a business fail, customers leave and employees jump ship simply because a business is sold to a new owner. I tell many buyers that most people exist to work towards the same ultimate goal and that is eventual retirement. Employees and customers aren’t typically shocked in disbelief and dismay when the current owner decides it’s time to move on, especially if it’s been 20+ years at the helm!”

Management of Expectations

As we’ve mentioned, there seems to be a discrepancy between buyer and seller expectations. While this is not atypical, perhaps it’s a bit more glaring in light of the past year. Staying flexible and keeping your expectations in check–whether you’re seeking to sell or seeking to acquire–will go a long way.

Scott Nicholson recommends that sellers don’t hold too tightly to their expectations up front. “Don’t anticipate what the buyer pool might have to say about your business,” cautions Scott. “Let them come at you one at a time and make their own opinions. Then decide if you want to try and make a deal with them.”

Pankaj Rajadhyaksha suggests to sellers that they decide what their main priorities are at the beginning of the process. “Do you want to sell quickly or do you want to sell at a premium? In this market, it’s difficult to get both unless you did really well in 2020 and Q1 2021.”

On both sides of the deal, it’s best to remain flexible, and not have your expectations too set in stone. Says Garrett Monroe, “Do not always look for the perfect opportunity. Broaden your scope because there are a ton of awesome businesses out there if you just open your eyes.”

When It Comes to Selling Your Business: Go Out on a High Note

While many owners of pandemic-proof businesses are hanging tight to their current cash cows, now may just be an ideal time to sell, particularly if they’re not too far from retirement or stepping down anyways. With prospective upcoming tax changes, there are plenty of financial incentives to sell sooner than later. 

Many business owners also make the mistake of waiting to sell until they’ve reached burnout, and by then, value is going down simply because they can’t keep up momentum.

Sam Scharich has seen this happen many times before, and offers a solution. “It seems when sellers finally decide it’s time to sell their business, it’s on the heels or in the midst of a slow year or two. If only they would realize they could get more for the Company if they leave it in the hands of someone new while it’s on top of the mountain and not the start of a down slope! Let us help you with a business valuation. Plan at least 2 years ahead if possible.. You’re going to get the most value by going out on a high note – don’t want until you’re burnt out and the business has begun to deteriorate to try to sell.”

This advice is perhaps now more relevant than ever. “Even though business is starting to pick back up and there is a light at the end of the COVID tunnel,” remarks Garrett Monroe, “right now still remains a fantastic time to sell a business. The SBA financing incentive is still in place and small businesses remain a great investment if you are looking for above average returns.”

Added Calder Managing Partner, Max Friar, “I think there’s a bit of a false sense that we’re all ready to blaze towards new economic highs. I think the challenge is shifting rather rapidly towards high inflation, supply chain chaos and longer lead times, and significant stress on the hiring/recruitment side. I prefer not to be pessimistic but there are quite a few small businesses that are going to struggle with this new set of challenges. More and more, owners who are already burnt out are going to be asking themselves: do I want to be the one to spend years navigating these new roadblocks, or is now the time to pass the reins?”

So how do you decide when is the right time to sell? While we can’t give you the exact magic formula for this, it’s sometime before the urgency to step down sets in. And if you’re looking back at an unprecedented year of revenue despite (or as a result of) the pandemic, and ahead at increasing taxes, it just might be right now.

In fact, selling on a high note doesn’t just help you out, but also your successor and, ultimately, your business. “Sell your business while your eyes are still on the prize instead of after you lose interest in keeping the momentum going,” recommends Rick Purcey. “It seems more often than not, owners leave the business to someone new with some real challenges ahead of it because they checked out years ago!”


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Calder Capital, LLC