Oct 6, 2014

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, business brokerage, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Lisa Forrest, Banc of California’s SBA Business Development Officer:

Companies with less than $10 Million of EBITDA are generally considered lower-middle market. These companies are typically privately-held, entrepreneurial and/or family owned. Prior to the great recession, the lower-middle market segment had been almost solely served by banks; local/community, regional or money-center depending on the size of the privately-held company. During that time, those bank lenders hadn’t been met with any serious competition other than from banks offering similar terms and service. Much has changed in recent years. As economic conditions have improved and the tide of baby-boomers looking to retire has risen, the credit needs of lower-middle market businesses have shifted from traditional working capital and asset-based financing to needs for expansion capital and business acquisition financing. Thus, there is a growing need for lenders that understand how to respond to these non-traditional credit needs. The lower-middle market segment is finally realizing long-awaited opportunities to grow their businesses. There are many baby-boomers who are also focused on selling their businesses in the next 5-10 years, now that they can realize a fair price for their businesses in this post-recession environment. Given these two trends, there is a growing demand for non-traditional credit products. Because both expansion and acquisition financing are beyond the expertise and experience of traditional banks, these entrepreneurs are increasingly being served by non-traditional lending channels.

The lending environment for expansion capital appears strong. According to PayNet, Credit risk remains low. Even though delinquency rates are rising across the big states, the risk for lenders is still quite acceptable. The increase in delinquency/loss is attributed to a return to risk-taking by small business. Businesses are back to investing in their companies and in expansion mode. More borrowing and more investment does bring increased risk; however, with this economic cycle, returns are brisk in relation to the risk presented at this time. An example of increased lending appetite for this segment is the Small Business Administration (SBA) appropriating another $1 Billion in annual funding for 2015, bringing the total SBA small business funding availability to $18.7 Billion.
Regarding Exit Planning and M&A opportunities for this lower-middle market segment, according to Allan Vander-Hamm, Principle, Business Transition and Valuation services with Berntson Porter & Company, PLLC, CPA firm, “The market for well-run companies with enterprise value in the $5 to $10 million range is currently quite active and is expected to remain so during this economic cycle. There are several popular funding sources, one of which, is the traditional option whereby a banks provides partial transaction funding (I.E. majority SBA or conventional loan in senior position with a smaller seller carry note in secondary position.) Two additional very active funding sources serving this lower-middle market are private equity groups (with lots of cash on the sidelines) and growing corporations with significant funds available for investment.”

Vander-Hamm continues by saying that, “Pepperdine University Private Capital Markets Project conducts periodic surveys of merger & acquisition advisors. Median enterprise EBITDA valuation multiples for closed transactions are in the 4X to 6X range. The multiple in large part depends on the quality of the seller and on buyer objectives. Acquisitions that add strategic value, combined with an M&A advisor-led auction process to develop competition among buyers, may even generate higher multiples.”

While these trends seem to bode well for the banking industry and the business community, bank lenders serving the lower-middle market/privately-held business segment need to reinvent their approach and stay in-front of the new opportunities with a well thought out strategy in mind. Good bank lenders will make sure they are adequately educated on the trends and not just reacting to the market. It’s obviously good news that business owners are back for expansion and exit/succession financing and the banking industry should approach these opportunities with care.

If you have any questions about this blog article or obtaining a SBA loan Lisa Forrest, Banc of California’s SBA Business Development Officer, can be reached at (425) 999-2042 or lisa.forrest@bancofcal.com.