2017 Third Quarter Insights on Business Transactions

Recently the International Business Brokers Association released its Market Pulse for 2017 third quarter. Here we’ll summarize the most interesting takeaways of this report which was based on a survey of 334 business brokers and M&A advisors.

2017 third quarter

Retirement Remains the #1 Reason for Sale

Retirement continues to be the most recently given reason among sellers in every valuation range. We saw retirement revealed as an important motivator in the 2016 BizBuySell survey of 1,700 small business owners, and this has not changed. Of course, retirement can mean different things to different sellers.

Other oft-cited reasons were burnout and new opportunities.

Reasons for Purchase

On the buy side, purchasers cited “Growing via Acquisition/Add-on” as the reason more often in every valuation range. Conversely, “Buying a Job” was less popular in every category. Transaction size made a difference, however. In the largest category polled, $2M-$5M, 48% of owners cited growth through acquisition as their motivation. For businesses valued as less than $500K, 52% stated they were “Buying a Job.”

According to David Ryan, an advisor with Upton Financial group in California, “Talent scarcity is driving M&A activity. For businesses looking to grow, acquisitions present an efficient way to land a trained and established labor force. When we talk to corporate M&A teams, we increasingly hear that talent acquisition is a key part of their strategy.”

Cash at Close

In Q3, owners received 71% or more of the price in cash at close. The majority of the balance came from seller financing along with some earn outs to close the valuation gap. These percentages remain relatively stable year over year.

Valuation

Year over year, multiples declined, while quarter over quarter, results varied. There was some decline in deals quarter over quarter in the <$500K, $500K-$1M, and $2M-$5M ranges. Still, multiples remain strong as sellers continue to view valuations as a compelling motivation, and buyers are no longer facing peak market prices and can more easily justify an acquisition.

In Demand

What is selling? In the <$500K market, restaurants are leading deals while in the $1M-$2M, $2M-$5M, and $5M-$50M ranges, manufacturing was the most popular type of business. Lisa Riley, CBI, Principal of LINK Business-Phoenix, said, “Manufacturing companies are really hot right now. The manufacturers we’ve been taking to market are getting strong values. Even manufacturers with significant issues like customer concentration are getting good looks, and it’s a sign of how keyed in the market is to manufacturing right now.”

2018 looks to be another promising year for the business market, based on past patterns. The tax reform legislation President Trump signed in December of 2017 may also result in more buyer demand.

Calder Capital, LLC

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