The diversity of the buyer universe: New and old investors go for the M&A market

published on 22 February 2022 | reading time approx. 2 minutes

 

Despite the Covid-19 pandemic, the M&A market continues to be bustling with activity. Capital continues to flow into the markets and seeks investment opportunities, e.g. through private equity companies and family offices. But also local and foreign companies (strategic investors) want to use the currently arising opportunities and improve their market position and are on the lookout for ready-to-sell companies in Germany. Anyone who wants to sell their company has a large number of buyers to pick and choose from. However, this has not only advantages but involves several hurdles, too.

The strategic reasons for selling a company are multi-faceted. In the medium-sized enterprises segment, the most important reason is the regulation of corporate succession. In addition, entrepreneurs often sell companies or their shares during restructuring or reorganisation in order to strengthen liquidity for the expansion of other companies. In past several years, private equity firms have also been selling their holdings mostly through a trade sale, since IPOs continue to be difficult to implement in the medium-sized enterprises segment.

 
The diversity and the number of potential buyers of companies in Germany have already been continuously increasing in recent years. Especially German medium-sized companies are getting more and more opportunities for finding a buyer. Essentially, the following trends have been observed among the different buyer groups:

• Management Buy-In (MBI); Management Buy-Out (MBO) candidates: More and more people can imagine owning a company. Coupled with significantly more equity, such individuals are a real alternative for medium-sized companies (target focus: companies with sales revenue of up to 20 million euros).
• Private equity firms from our neighbouring countries, such as Switzerland and the Netherlands, but also from Scandinavia (target focus: companies with sales revenue of 10 to 100 million euros) as well as from other continents, e.g. Asia or North America, are increasingly expanding and focusing their activities on Germany (target focus: companies with sales revenue of 50 to 500 million euros).
• The number of family offices is steadily increasing. The companies, which are generally established from the free assets of (former) entrepreneurial families, are looking for companies to invest in to diversify their asset portfolios in the long term (target focus: companies with sales revenue of 20 to 200 million euros).
• Local companies: Corporate groups have always been active buyers. The interest of larger companies from the medium-sized enterprises sector in furthering their own inorganic growth through targeted acquisitions has increased. Successful strategies, such as “buy-and-build”, often imitate those from the world of financial investors to independently speed up and shape market adjustments and concentrations.
• Foreign companies: While demand from China remains high, further players from Asia, e.g. India, or a strengthened medium-sized enterprises sector from Eastern Europe (target focus: companies with sales revenue of 20 to 300 million euros) are joining the game.

The increase in the number of potential buyers or (when viewed from the other perspective) the lack of ready-to-sell companies, has resulted in high purchase price levels. Levels which, even during the coronavirus pandemic, only dropped in the case of those companies that were negatively affected by the pandemic.

However, higher company prices, as positive as they are, also create new hurdles for sellers: buyers' requirements – especially in due diligence – have increased tremendously. The seller's accounting and controlling must be able to promptly provide a large amount of high-quality and meaningful financial information – unfortunately, not every medium-sized company is able to do this.

 
In the case of international investors, the sales process is more complex because of the cultural and language barriers to overcome and the contractual arrangements to be made across two or sometimes even more legal jurisdictions. Only a few consulting firms are able to provide integrated advice on such a process on a cross-border basis.

 
When it comes to “culture”, managing the sales process is certainly easier if the buyer is a family business or a family office. Negotiations take place at eye level, both sides speak the same language and usually pursue similar interests. But investment companies and corporate groups have also long adapted to medium-sized companies and adjusted their approach.

 

Conclusion

In our view, the advantages of stronger demand outweigh the disadvantages due to the trend towards higher purchase prices and better contractual conditions, e.g. with regard to seller guarantees and liability regulations. The advantages of increased competition from more potential buyers in the M&A market are outshone by the greater complexity due to the number and origin of the buyers, but also by the higher requirements, e.g. regarding the preparation of financial data. With the right preparation for a sales process, however, the hurdles should not be deal killers.