The North American mid-market mergers & acquisitions has cooled somewhat this year after a huge 2014. But with so many factors at play, what do the next 12 months hold?

Mergermarket (MM): As we head into the New Year, what are the current factors defining mergers & acquisitions in North America’s mid-market?

Jerry Black (JB): The market has been driven by factors such as the low cost of financing — principally as a result of low interest rates — economic stability, positive economic growth in the United States compared with most of the rest of the world and the demographics resulting in baby boomers reaching retirement age. With the latter, they are wanting to sell their companies, primarily to generate liquidity and to maximize current market values.

In addition, many companies are now more inclined than they were in the past to pursue growth through acquisition. They recognize that the purchase of an existing business that aligns or expands upon current operations is a faster path to growth, or that certain new or synergetic business lines and support capabilities will complement their business operations and growth.

Important limiting factors as a result of recent acquisition activity in mergers & acquisitions generally, including the mid-market, are a smaller supply of quality acquisition targets and increased valuations. Finding companies which do not have inflated valuations and do not create excessive risk in terms of meeting the acquirer’s financial and business objectives will be more of a challenge. In light of the larger transactions consummated more recently, competitive pressures are causing an increase in mid-market transactions in order to accelerate growth and result in higher valuations.

T. Patrick Hurley, Jr (PH): For the owner/operator, family business or entrepreneurial group, it’s been a question of whether it’s time for them to do something. If we’re talking about selling — whether it’s based on age, health or having a good record — they don’t want to go into poor market conditions, but the market conditions are less of a factor than whether it’s time for them to consider something. In one recent case, it’s been because there was a significant funding issue related to the scale that they needed to be — this was a company doing about $80m in revenues that decided that rather than go out and possibly get stomped, they needed to find a partner that had the strength and motivation that would pay them a very nice value, and were willing to do it on a combo of about 50% current in the price and 50% in an earnout where they really believed in it.