Canadian Deal Flow in the Lower-Mid Market - June 2021

June 08, 2021

by an intermediary from University of Alberta in Edmonton, AB, Canada

Looking to get your thoughts on Canadian lower-mid market deal flow

While I think that significant deal flow has returned, it has a bit of a "K" recovery flavor to it. COVID friendly sectors doing great and COVID unfriendly sectors still in trouble accordingly. However the vast majority of traditional businesses are in the middle of those two themes and are still on the path to a full recovery (trying to prove that their 2021 budgets are looking again like 2019 results).

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Reply by a searcher
in New York, NY, USA

Duane - Agree w. majority of that. As you mentioned, we are in a market of full valuations, thus it is largely a sellers market which allows them to command better terms. That being said, I would intuitively assume that a "creative" structure would be a major pushback from the seller as it adds complexity and likely creates additional deal risk in that sellers, some of whom aren't very financially savvy might re-trade or walk even after signing an LOI once their advisors walk them through all the nitty-gritty of the structure and then realize they had signed-up for a structure they didn't fully understand. Would be interested in hearing your thoughts and/or experiences with overcoming pushbacks related to structure.

Reply by an investor
from Harvard University in Chicago, IL, USA

There is indeed a lot of cash out there supporting high valuations. Waiting it out is not really an option for most which means you have to maintain disclipline and develop even greater conviction in a business as well as get creative with structure. Larger earnouts to bridge the valuation gap and higher seller roll % with the potential to further buy down the seller at FMV at certain windows in the future (i.e., Year 2, Year 3) are some strategies you might consider. If valuations normalize, you may be able to acquire some/all of the sellers remaining interest at a more normal multiple (somewhat offset by any growth you've achieved).

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