Fear of missing out is driving buyers in key sectors to move on mergers and acquisitions (M&A) in record time, with some deals completing faster than it takes to sell the average suburban house.
Within days of promoting a business for sale, we are seeing interest and offers.
Within a week, we are in serious negotiations.
In one recent deal, it was less than nine weeks from appointment to cash changing hands.
That timeline is a sign of how heated the Australian M&A landscape has become, even if the full picture of deals this year won’t become clear for another few months.
We know the value of M&A in the second half of the year will exceed that in the first half, boosted by a couple of megadeals including the US$29 billion ($39 billion) planned takeover of Afterpay by Square.
Add in the $41 billion proposed merger of BHP and Woodside and you start to get a sense of how strong recent months have been.
But volume is where the story gets exciting.
In sectors largely unaffected by the pandemic — or, in some cases, benefiting from a captive local audience working from home with fewer places to spend disposal income — volumes are as high as twice that seen in an ordinary year.
Buyers are looking for businesses that have shown resilience in the face of the COVID-19 crisis, that have the systems in place to perform in a disrupted market, and that have something to offer, whether that is growth prospects, new intellectual property, a tech solution that gives them a competitive edge, or a solid customer base.
Financial services businesses are the obvious example here, and the sector continues to outperform for M&A as buyers look to snap up targets that solve a problem, reduce costs, or open up the door to new markets.
Yes, traditional sectors in which physical inspections or supply chain analysis are needed tend to require more time to conduct due diligence.
But even here buyers are also approaching the market understanding that it might be better to buy than build. In a period where labour, supplies, components and even land face shortages, it could be easier to purchase a business that comes with a factory than build a factory and team from scratch.
With these pressures apparent on the buy-side, time is of the essence.
If a business ticks the right boxes, buyers are moving fast and often offering above the odds to secure the target.
Why it’s now a seller’s market
There’s another trend, though, that illustrates why this is such a seller’s market.
Prior to the pandemic, we were seeing a trend towards earnouts in deals, as a way to apportion the risk.
In an earnout, rather than the buyer acquiring a business for a price and hoping that value holds up, a portion of the sale price is deferred and paid over time once performance or sales targets are met.
It’s a way that buyers, particularly private equity, can safeguard themselves against the risk of purchasing an asset that turns out to be over-valued.
We — and much of the rest of the market — expected earnouts to feature strongly while Australia was still in the grip of the pandemic.
After all, if you can’t predict from week to week if you will be in lockdown or able to cross a border, how could buyers make an accurate call on value in the long term?
But with the market as strong as it is now, earnouts are the exception not the rule, prices are climbing and valuations remain high.
Yet despite these signs of a market performing as strongly as anyone could have hoped, not everyone has got the memo that these are serious times for serious deals.
When a business heads to market, you still get tyre kickers hoping for a fire sale, but you also get would-be sellers who respond to headlines and toy with going to market without having done the legwork needed to prepare their business for sale.
If a business owner has not got the right systems and processes in place, has little data or intelligence on its clients and market, or doesn’t have the right people and culture, they won’t achieve the sums they hope to generate.
Getting advice early as a seller about how to prepare and present well for sale is critical to avoid unmet expectations.
And for buyers, good advice pays as well — it can help them sort out the deals from the duds, so they can move quickly in a seller’s market without risking buyer’s remorse.