It has been a while since we have seen the Mergers & Acquisition business restart its engine. Since 2007, the number of sales of closely held businesses that have sold has slowed to a standstill. Many businesses that should have sold during the past four years are still sitting on the sidelines waiting for all of the necessary M&A ingredients to come together. Unfortunately, for the smaller size businesses, they may have a bit longer to wait.

Closely held businesses that should sell include those that have owners that are no longer capable of growing, stabilizing or even operating the business because of personal, health, emotional, energy or economic reasons. In the business community, we all know of at least a few of these businesses. In my case, I know of more than just a few – there are a number of businesses that, in more normal economic times, would and should have sold during this period. Most of those businesses now continue to sit on the shelf waiting for the planets and stars to line up so their owners can receive some reasonable value for their investment.

In talking to investment bankers recently, the deal flow is beginning to pick up – but almost exclusively for businesses with a transaction value of $10 million or better. Bob Welch, of City Securities in Indianapolis, says that three critical ingredients are starting to come together for larger transactions that have not been there in the past four years.

1. Commercial banks are more active in the acquisition financing than they have been in the past few years. This doesn’t mean that commercial banks have returned to the craziness that led to this recession, but at least they are looking and showing interest in structuring loans that make sense and that can make the bank a profit.
2. ROI’s for buyers are improving because asking prices are generally very low since many businesses have lost value during the recession, primarily due to lower earnings. Buyers, and especially sophisticated buyers, now feel as though they are buying on the way up versus buying at the top of the value cycle, resulting in a quicker and more robust ROI than previously
3. Lastly, private equity firms that have been on the sidelines during this period are finally beginning to come to the table with hard equity to get deals done. Private equity firms have been accumulating cash for years hoping to find alternative safe investment vehicles to hold the cash and ride out the storm. It appears that their patience has run thin in view of the negligible returns that cash investment alternatives offer today.

Unfortunately for the vast majority of closely held businesses that don’t have a value over $10 million, these factors don’t apply. Those businesses continue to see their value decline and the opportunities to sell shrink. Many have shut down their businesses, sought protection through bankruptcy or essentially given the business away in an effort to at least get out from under personal guarantees.

So where does this leave these smaller closely held businesses? I believe that the answer lies in sellers being willing to structure sales transactions that provide for less cash at closing, more assumption of risk and a longer payout. Deals that follow this new structure can be done – but it takes a combination of expertise, risk-taking and finding a buyer that has the financial, operational and market knowledge necessary to make it work.