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    September-2016
 
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Smaller Businesses Are In Demand From Buyers Seeking Enterprises To Own

The sale of smaller businesses were up in 2015 and are expected to have another strong year in 2016.

The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project showed that business sales remained strong in 2015 especially in the Main Street market.

The Main Street market generally refers to smaller commercial establishments, so named because many are found in towns across the United States.

More than 60% of advisors who responded to the survey met or exceeded their 2014 closure records. Outlooks are positive and M&A advisors who aid business owners and buyers in selling and buying businesses expect a 60% net increase in new deals in 2016. Compared to a year ago optimism has grown and advisors anticipate greater deal flow, increased business exit opportunities for sellers and opportunities for business growth in 2016.

The Small Business Administration had a record year distributing more than $23.6 billion in loans in FY 2015.  There was also significant private capital and traditional lending for the Main Street market in 2015 as 71% of Market Pulse study respondents who closed deals under $2MM in value reported that the businesses utilized financing other than SBA funds.  

The SBA record year coupled with the traditional lending demonstrates how incredibly active for the Main Street market was in 2015.

The Q4 2015 survey which compares the conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM -$50MM) was completed by 348 business brokers and M&A advisors representing 38 states. Respondents completed 410 transactions in the 4th quarter of 2015.

“Advisors are optimistic that general business conditions will be solid again this year,” said Joe Lindsey, CBI, M&AMI, President of JLC, Inc. and M&A Source Chair.  “Only nineteen percent of the survey respondents indicated some pessimism that conditions will deteriorate, which may be attributed to the upcoming election, a continued slump in oil prices, or the early 2016 drop in the stock market.” 

The Market Pulse Survey showed that in Q4 2015 deals took longer to close across all sectors. Closing times nearly doubled in the Main Street market, while the Lower Middle Market also saw jumps of up to four months. New this survey, advisors reported on the average time for deals to move from letter of intent (LOI) or offer to closing. In every sector except the smallest, deals took three months to close after a signed LOI.

“Typically the larger the deal, the longer it takes to close,” says Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project. “But the lower middle market has a large number of active buyers, and one way buyers win deals is to show they can close more quickly. As more buyers come to the table, advisors are able to run a more efficient process.” 

Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less.

“Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” says Scott Bushkie, CBI, M&AMI, President of Cornerstone Business Services and IBBA Chair. “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015) whereas in the lower middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”  

Additional Key Findings:

  • Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the Lower Middle Market.  
  • Main Street businesses sold for approximately 91% of their asking price in Q4 2015. By comparison, Lower Middle Market businesses—which typically aren’t marketed with an asking price—received 99.5% of the internal benchmark set by the advisor and seller.
  • In the smallest deal category (businesses valued at <$500K) first time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5MM to $50MM) private equity made up the largest buyer group. PE groups were not active at all in the <$500K segment, while individual buyers accounted for only 14% (7% first time buyers, 7% repeat owners) of the larger sector.
  • Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the Lower Middle Market as well. Manufacturing companies led the Lower Middle Market.  

About International Business Brokers Association (IBBA) and the M&A SourceFounded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions.


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