Report Predicts Hot M&A Market for Private Companies
Despite uncertainty about tax reform, last year was an impressive year for sales of private businesses — and that momentum is expected to pick up additional speed in 2018.
Small business transactions (valued at $50 million or less) set record highs in 2017 — in terms of volume and average pricing multiples, according to The Market Pulse Report (See “Survey Says…” below). In addition, 73% of brokers surveyed predict that sales of small businesses will continue to increase in the next 12 months.
Why are business brokers predicting such a robust mergers and acquisitions (M&A) market? They say current conditions are ripe for business sales:
- The new tax law is expected to provide buyers with extra cash flow to spend on growth opportunities,
- Interest rates remain low compared to historical levels (despite recent Federal Reserve hikes), and
- The Small Business Administration lowered the down-payment requirement on business acquisitions from 25% to 10%.
If you’re planning to cash out in the next few years, consider these tips for making your business sale-ready.
The quarterly Market Pulse Survey evaluates market conditions for small businesses (with market values of up to $50 million).
This survey has been published since 1993. It’s a joint effort of the International Business Brokers Association (a non-profit trade association), M&A Source (a professional association of middle-market M&A intermediaries), and Pepperdine Graziadio Business School. The Q4 2017 survey was completed by 264 business brokers and advisors, representing 36 states and 227 transactions. Key findings from the most recent survey include:
(Less than $2M in value
|Lower Middle Market
($2M to $50M in value)
|Which sectors are hot?||
1. Personal services (19%)
2. Restaurants (17%)
3. Business services (15%)
1. Manufacturing (23%)
2. Construction (15%)
3. Business services (14%)
Existing businesses (28%)
Existing businesses (38%)
Private equity firms (18%)
Last year, the two main reasons for selling a business were retirement and burnout. On average, sellers realized 99% of the asking price in 2017, compared to a 90% realization rate in 2016.
In 2017, the average seller received more than 80% of the selling price in cash (from a combination of the buyer’s equity and senior debt financing). The rest of the deal typically consisted of:
- Seller financing,
- Earnouts (where part of the selling price is contingent on future performance),
- Post-acquisition equity participation in the merged entity, or
- A combination of these terms.
Seller financing is generally popular with Main Street businesses. But earnouts and equity participation is more common with lower middle market companies.
Time spent preparing your business for sale can significantly increase the value and reduce the time it takes to close. A business valuation professional can help you look beyond the value of equity reported on your balance sheet and industry rules of thumb.
For instance, valuators can provide data on comparable business sales and compute EBITDA or SDE multiples based on that data. Alternatively, they can perform a discounted cash flow analysis to help you understand how private equity investors may perceive your operations. These complex analyses help buyers set asking prices that are based on real market data, rather than gut instinct.
Contact a valuation professional to discuss your options in today’s hot M&A market. Value-added improvements made before your business goes on the market will help maximize its appeal to potential buyers.