The IBBA and M&A Source have recently released their Market Pulse Survey results covering Q4 of 2018, with a key takeaway being that dealmakers anticipate that the current seller’s market won’t continue into 2020, or 2021 at the latest.
Furthermore, those same dealmakers suspect the overall time to close deals will take longer than the current one-year average for those businesses in the Lower Middle Market (value of $2m to $50m).
“increased deal activity is being driven in part by the low unemployment rate” commented Craig Everett, PhD, Assistant Director of Finance and Director of the Pepperdine Private Capital Markets Project, which supported the Survey in conjunction with the Pepperdine Graziadio Business School. This low rate of unemployment is aided by the conducive lending market, which combined have created favorable selling conditions.
“However, advisors aren’t optimistic that the current climate will last through 2020. Considering that it’s taking about a year to sell a business valued between $2 million – $50 million sellers should consider going to the market before the market flips” added Mr Everett.
According to Scott Bushkie, President of Cornerstone Business Services, “Business owners have more exit opportunities as buyers continue to offer a whole range of deal structures.”
Yet the length of time taken to close a deal is being affected by prices. “Deals are taking longer in due diligence as buyers work hard to validate their investment and make sure what they’re buying is worth the premium price today’s sellers are commanding” stated Neal Isaacs, Owner of VR Business Brokers of the Triangle.
Another interesting trend highlighted in the Survey is that sellers are still receiving the majority of cash at close of any deal. For companies valued at $2 million – $5 million, an average of 78% or more of cash was received at close. The majority of this balance was seller financing, but this was supplemented with earn outs and retained equity in order to bridge the difference to the valuation.
Industry-wise, for the Lower Middle Market (LMM), manufacturing businesses represented the largest share of transactions (27%), followed by construction & engineering. For the smaller Main Street Market, personal services (19%) led business services (16%), restaurants (15%) and consumer goods & retail (14%).
Individual buyers represented 78% of Main Street Market deals in the quarter, in comparison to 20% of deals completed by existing companies. These figures were not mirrored in the LMM sector, with both individuals and existing companies acquiring in 34% of deals.
Looking at reasons for sales, retirement continues to be the major factor in the majority of cases. Rather worryingly, burnout is also a major factor, accounting for 17% of reasons for sales in the LMM sector. “The key is to get out while you are still energized and feeling good about your business” said Lisa Riley, Principal of LINK Business-Phoenix.
Scott Bushkie stated the importance of the most recent 12 months, and that hanging on too long could have major repercussions. “The truth is, if you’re in business for 40 years, and you hang on 18 months too long, you could lose half the value in your company based on just four percent of your history.”
Significantly, 2018 is the first full year in which four of the five market segments (0 – $500,000, $500,000 to $1m, $1m to $2m, $2m to $5m and $5m to $50) have been described as a seller’s market (with the exception being the $500,000 to $1m category). “Demand is outstripping supply, particularly in the LMM… We’re seeing multiple offers when a high-performing business comes on the market, and buyers are dealing with heavy competition” according to David Ryan, Advisor with Upton Financial Group in California.
Also key is the fact that in the LMM, internal benchmarks are being outstripped, outperforming Q4 2017 in the process.
And in another predicted trend, dealmakers do not see additional multiple growth in 2019.
Finally, regarding time to close, the average period is 9.3 months, which is slower in comparison to the previous average.
The Market Pulse Survey was produced with the support of the Pepperdine Private Capital Markets Project and the Pepperdine Graziadio Business School, and was completed by 319 business brokers and M&A advisors, covering 273 transactions.
Segments studied included Main Street (businesses up to $2mm) and Lower Middle Market ($2m to $50m).