29 January 2014

The investment climate for buying and selling small to medium-sized Belgian companies improved in 2013, a trend which will also continue this year. More capital is available and the number of players on the M&A market has increased. The increased competition means it is now harder to find high-quality companies. Closing the deal also takes longer than before, as the sales process is becoming more professional and more thorough. As regards financing, the own contribution percentage has increased considerably. This is because banks have become more cautious about lending. Finally, investors are increasingly looking for alternative financing methods. In the new financing climate, the question is whether the proposed returns can be achieved.

These are the main conclusions of the first Entrepreneurial Buyout Monitor, a survey of the trends in the management buyout (MBO) and management buy-in (MBI) market in 2013 on the one hand and the expectations for 2014 on the other. For this survey, we questioned 175 Belgian M&A experts who have spent an average of 12 years working as intermediaries for MBOs and MBIs involving small and medium-sized companies (SMEs) in Belgium. They are mainly bankers, private equity partners, brokers, lawyers and M&A players. Two-thirds of the respondents mainly work on medium-sized deals worth 20 million euros or less.

The survey was conducted by the Platform for Entrepreneurial Buyouts (PEBO), a joint initiative by Vlerick Business School and BDO Belgium. The survey will be repeated on an annual basis, which will allow us to establish long-term trends.

Improving investment climate

The buying and selling climate appears to have improved significantly in 2013, and this trend will also continue in 2014. This confidence can be seen in the increasing number of companies for sale last year, and also the number of deals which were concluded. Based on their market knowledge, a considerable number of respondents expect the number of buyers and companies for sale to increase in 2014.

This positive trend is due to the following factors:

  1. Improved economic outlook.
  2. Owner managers approaching retirement being increasingly willing to look for succession. In this context, the government is also conducting awareness campaigns aimed at the baby boomer generation, who are becoming increasingly aware of the opportunities available for selling their company.
  3. More capital is available. In addition, other investments (bank, real estate, stock exchange) are not as profitable as before. Quite a few new (often small) private equity firms and family offices have also launched recently, and people are starting to invest in deals that until recently would not have satisfied traditional requirements for high returns.

Miguel Meuleman, Professor in Entrepreneurship at Vlerick Business School, sees a genuine trend in the increase in the number of private equity companies and the number of family offices in particular: “As a result of the ageing population, the SME market offers various opportunities. In addition, many companies have undergone restructuring since 2009. In combination with the improved economic outlook, more and more companies are now becoming saleable. They can once again offer investors good projections for the future. Conversely, increasing numbers of wealthy Belgian families are interested in investing solo or via family offices. In turn, this is often connected with succession. It is often former entrepreneurs who, after selling their own company, wish to reinvest the money in new companies, in their own sector or otherwise. It's in their blood.”

More capital means more players, but Miguel Meuleman questions the quality of these new, often very small players and therefore also the quality of the deals involved. “How professional is the post-acquisition phase? Will the proposed profits be achieved? The fact that you have an entrepreneurial past doesn't necessarily make you a good investor. Certainly if you are leaving the comfort zone of your own sector. The market still needs to prove itself in terms of professionalism. This will certainly prove a challenge in the future.”

Closing the deal takes longer

In the past year, the competition in the MBO and MBI market has increased, mainly in the segment of medium-sized to large deals. More capital is available, there are more players on the market and also more demand for companies as a result. This makes it harder to close high-quality deals. Miguel Meuleman makes the following point: “Investors therefore have to be increasingly proactive about looking for companies which would like to close a deal before the sale goes public and involves competition between various different investors.”

As regards price – after the peak before the crisis and the drop during the crisis – in 2013 we are once again seeing a return to levels which could be considered more or less normal. The majority of the interviewed experts expect the slight price increase seen during 2013 to continue in 2014. This is mainly due to an increase in the number of family offices and private equity players and the improved economic prospects.

In 2013, closing the deal also took longer than had previously been the case. This is because the sales process has become much more professional. As a result of the economic climate, growth margins have become smaller and business plans are therefore being subjected to increasingly thorough due diligence and critical analysis. As a result, the crisis is also having a positive effect.


In comparison with deals closed before the crisis, the percentage of equity and semi-equity in the total financingrose significantly last year to an average of 35.4%. However, this figure is expected to stabilise in 2014.

This increase is mainly due to the banks which have become far more cautious about lending since the banking crisis and the introduction of new regulations. As the bank now requires a higher own contribution, the amount available for deals has decreased. However, since the economic recovery after the crisis, the debt ratio has fallen to a normal level once again. This is also expected to remain stable in 2014. Nonetheless, the debt conditions (such as personal guarantees, pledges and mortgages) have tightened significantly.

A third factor which influences the financing aspect is the increase in the amount of private equity which is available. Not only are there more players on the market, they also have a great deal of uninvested capital. This is because few deals were concluded during the crisis. The respondents expect the availability of private equity to increase still further in 2014.

Finally, investors are increasingly looking for alternative financing methods to bridge the gap. Vendor loans, whereby the seller is prepared to remain partly involved in the deal, may help here. The use of earn-outs also increased last year, mainly for smaller and more flexible deals. They are an effective mechanism for balancing a seller’s price expectations and a buyer’s valuation.