Middle market investment banking provides some unique challenges for both buyer and seller.

Most importantly, the number of buyers or sellers available to do a transaction, relative to the very large deals that dominate the headlines, is huge. Many people underestimate how many possible targets or buyers there are to complete their transaction. It’s one of the reasons why an M&A advisor is even more important for a middle market transaction.

Another major distinction of middle market investment banking is that most of the entrepreneurs have never purchased or sold a business before. For many of these individuals, pursuing a transaction may be difficult to understand. M&A can be a complex maze. For example, it’s important how and when certain information is released, when and what type of Non-Disclosure Agreement is used, and how to structure a transaction that is fair to both parties.

The value of a middle market investment banking transaction is always a hot topic among both buyer and seller. Many entrepreneurs have devoted themselves to building their business so they’re not familiar with terms like EBITDA or multiples. There are many stories about this misunderstanding, for example, one entrepreneur was telling everyone that the EBITDA multiple was dictated by the company’s zip code. Nothing could be further from the truth, but this poignant comment is a clue that M&A is a highly specialized field. Another entrepreneur noted that they wanted to sell their business for x million based on his retirement needs, the necessity of paying for their grandchildren’s college educations, etc. Those were all admirable goals, but had nothing to do with the value of the business.

Negotiating a transaction is an art, not a science. To be successful, both parties, on either side of a transaction, need to focus on win-win negotiating. That usually produces the best outcome for both parties. As most middle market business owners do not have significant M&A negotiating experience, there are frequently many transactions that fail. Most of them could have had a positive outcome, but the parties did not find a solution fast enough to keep the transaction moving forward.

To summarize, middle market investment banking is different than very large company investment banking. First of all, most of the time, it’s the individuals’ own money that is at stake. Large companies have millions of shareholders and a mistake on an M&A transaction won’t carry the consequences of a bad transaction for an individual. In most cases, the success of a middle market transaction could be insured by engaging professional investment bankers who know how to navigate the complex M&A maze, can guide the negotiations, and have the requisite experience to structure a mutually acceptable transaction.

We are half way through the fourth quarter and M&A activity looks fairly normal for this time of year. Typically, there is a huge surge of transactions that are announced or closed in December of each year. Many times, there are tax considerations that are driving a closing before year end. In other cases, buyers and sellers have other objectives that they want or need to fulfill before year end.

I founded Versailles Group over 26 years ago to assist entrepreneurs and corporations close the very best M&A transactions possible. 28+ years ago, that was a concept. Today, it’s a reality. We’ve helped individuals and companies on five continents. In many cases, we’ve done multiple transactions for the same individuals or companies. The results reflect our passion for completing exceptional transactions.
The key to successful M&A is to begin exploring how a transaction might help fulfill your goals sooner rather than later so that there’s time to do it efficiently and effectively. Corporates typically pursue acquisitions or divestitures in the normal course of business and are well-acquainted with the process and possible outcomes. On the other hand, most entrepreneurs only do one or two transactions in their lifetime. For both corporates and entrepreneurs, it’s important that transactions be done well. That’s our forte!

November is an excellent time to consider your 2014 M&A goals. M&A is a very effective means of divesting an unprofitable business or divesting a business in order to diversify your portfolio. Many people wait too long before selling and find that the extra years of ownership didn’t add any value. On the buy-side, an acquisition can provide a route to new markets, provide additional product offerings, help diversify, etc.

In the third quarter, M&A activity in the US and Canada increased dramatically, exceeding both 2012 and 2011 activity levels. Europe has also seen a resurgence of M&A activity despite some very difficult economic conditions. M&A activity is also up in Asia / Pacific, Africa / Middle East and in Latin America; however, Latin America hasn’t seen as much of an increase as the other geographies.

The question that this raises is why is M&A activity increasing? There are many reasons for this, including strong fundamentals, e.g., cheap and available capital, but also the simple fact that companies find M&A to be a very attractive way to build or defend shareholder value. Clearly, it’s faster and more advantageous for a company to acquire another business, people, products, equipment, customers, etc. than to build it from scratch. That’s an opportunity for both buyer and seller.

The fourth quarter is an excellent time to begin exploring the acquisition or divestiture of a business to build or protect shareholder wealth in the coming year. I founded Versailles Group almost 27 years ago as I’m passionate about helping management and/or owners grow or divest their businesses to enhance shareholder wealth.

Year-to-date, M&A activity has been robust, as reflected in the chart below. Despite a modest start to the year, the value of M&A transactions is up, over the same time period last year, in all regions except for Asia Pacific.

Low interest rates, willing lenders, buyers with large cash balances, and other strong fundamentals are contributing to M&A activity around the world. And, it appears that deal multiples are increasing due to competition between private equity firms and strategic buyers. One of the strategies of both of these types of buyers is to enhance shareholders’ wealth via the acquisition of companies.

There are two questions that every business owner or CEO should ask, at least annually: when should we acquire a company and when should we sell either all or part of the company. The answer is not always straightforward, but the question is worthy of significant attention. With over 30 years of M&A experience, I have personally seen many businesses miss valuable opportunities by hesitating to consider a transaction.

There were 21,605 M&A transactions announced, worldwide, in the first half of 2013. The totals by geographic region were as follows:

The US is continuing to lead the volume of M&A transactions with Europe not too far behind. While everyone is continuing to debate whether there is a recovery and if there is a recovery how strong it is, smart companies are completing transactions to fulfill management and shareholder objectives. And, they will benefit from these transactions in both the near and long terms.

With all these transactions taking place, the obvious question is what is the right time to undertake a divestiture or acquire another company? There are many correct answers to that question; however, the real answer is that it depends on your objectives. Most of the time, people/companies wait too long to pursue a transaction; consequently, they miss many viable and valuable opportunities.

Over the past few years, the M&A landscape has changed quite dramatically from a geographic standpoint. As we’ve mentioned in the past, M&A activity in Europe has seen a quite precipitous decline, with associated increases in M&A activity in the United States / Canada and Asia / Pacific regions, and we fully expect this trend to continue in the near term.

The one region that has failed to receive much M&A attention is Africa / Middle East, which, in the chart above, follows nearly the same path as that of the Latin America and Caribbean region; however, it appears that there may be a sharp increase in M&A activity in Africa over the next three to five years.

Africa has a plethora of natural resources, such as oil and natural gas, iron ore, copper, etc. Many Chinese companies have already recognized the value and invested in these areas. As companies with large cash positions from other regions of the world start to deploy their capital to develop these natural resources, there will be a noticeable uptick in M&A activity in Africa.

Over the past four quarters, there has been significant growth in M&A activity in the middle market of Latin America and the Caribbean. Both the number of M&A deals, aggregate value, and average value of M&A transactions in these regions have increased substantially.

The number of deals have increased in each quarter, from 45 in Q3 of 2011, to 83 in Q4 of 2011, to 107 in Q1 of 2012, and finally to 135 in Q2 of 2012.

Additionally, the aggregate value of these transactions increased substantially, from US$2,203MM in Q3 of 2011 to US$11,043MM in Q2 of 2012.

In terms of the average value per transaction, the first three quarters mentioned had fairly consistent figures (US$48.9MM, US$41.9MM, and US$43.6MM). However, Q2 of 2012 saw an 87% increase in the average value per transaction, jumping to US$81.8MM. A portion of this spike can be attributed to the M&A activity in energy and consumer staples, which experienced exponential increases.

As a result of these drastic increases in M&A activity, Brazilian middle market M&A now represents 31% of all middle market M&A deals in Latin America and the Caribbean. There are a number of reasons for this, including currency factors, changes in antitrust laws, growth in infrastructure projects in Brazil related to the impending Olympic Games and World Cup events, etc.

Over the past three years, the emergence of the South American economy has not been a surprise to many. While Brazil may be the first country that comes to mind when one mentions a strong South American economy, other countries such as Argentina, Uruguay, and Colombia will start to make more headlines over the next two to three years. After all, their respective GDP growth rates on a year-over-year basis are the three highest in South America at 9.30%, 8.47%, and 7.7%.

From an M&A standpoint, in these countries combined, there were 42 more deals announced or closed in 2011 than there were in 2010. The associated transaction values jumped by $3.6 billion. In terms of the increase in number of transactions and the aggregate increase in transaction value, both increased by 22% from 2010 to 2011. Furthermore, almost 60% of all deals occurred in one of the four following sectors: Energy, Financials, Materials, and Industrials.

With strong macroeconomic factors, we expect M&A in these and other South American countries to continue the upward trend in 2012. Additionally, as more and more companies worldwide begin to see the tremendous growth opportunities that these countries present, the number of transactions should continue to increase every year.