The most recent survey done by IBBA and M&A Source Market Pulse reveals that the market for businesses was still very active and deals were still getting continuously done as fiscal year 2018 closed out. This market continues to be a seller’s market, and experts do not expect that this will change in the near future. Entering into 2019, it’s a great time to sell a business, but also a good time to buy.
Small Business Confidence Is at a Record High
Whatever the experts say about the economy, business owners report optimism about it. We are currently in the longest sustained streak of small business optimism in history. As a result of CEO confidence, fewer of them are putting their companies up for sale. They feel less urgency, and M&A advisors do not see that changing right away. New deal flow is steady but lower in volume than would be ideal. It’s unlikely that the market will see an influx of new Baby Boomer businesses for sale in the near future. Boomers are holding on a little longer to their companies while the economy is booming.
Demand among buyers remains high, however, which means that sellers have choice when they do put their businesses up for sale. Buyers are competing against each other for good businesses. This translates into stronger valuations and more advantageous deal structures with more cash at close for sellers since they have greater leverage at the present moment in time.
Another complication for buyers is that they are currently competing with private equity for business deals. There is record amounts of acquisition capital among both strategic buyers and private equity currently in the market. As more private equity enters the market, more buyers are shifting focus to smaller businesses, so sellers in every price range have an advantage. Healthy corporate balance sheets and relatively low cost of debt to finance also factor in. Â
The result is that multiples remain near or above historic average, and sellers are closing with more cash in hand. The market is gifting them with a less risky environment for sales. Still, sellers should not expect to walk away with the entire price of their business in cash. Seller financing almost always makes up a portion of these deals. Buyers, of course, feel better knowing that the seller is still invested in the business’s success via at least partial financing.
Currently the amount of time it takes to sell a business is 7-10 months from the time it goes on the market until close. This is up 1.5 months from Q3 in 2017 for the Main Street market. For the Lower Middle Market businesses valued at between $2MM – $5MM, it remained steady at 7-10 months. When questioned, 83% of M&A advisors working with Main Street Properties of $1MM – $2MM expected valuations to remain steady, and 78% of M&A advisors in the Lower Middle Market agreed.
The survey also revealed that sellers are not adequately preparing their businesses for sale. Transitional planning of at least 2 years, but preferably longer, is necessary for sellers to get the best prices for their companies at close. However, when questioned, 67% of sellers did no advance planning before listing their business for sale. Those who did typically did less than a year of planning. Only 3% did more than 2 years of planning.
Calder Capital would like our clients to understand that while it is a seller’s market, individual sellers should not begin the process believing all they’ll have to do is show up to sell their business at the price they believe it’s worth. Interest rates have risen, and there is some concern about the stability of the economy and risk of recession. This has depressed valuation multiples. As always, it’s good to get a professional opinion on the real value of your business before you begin to plan for the future.
Working with a M&A advisor roughly doubles chance of selling a business, but the work that sellers do to improve their companies and make them more profitable and self-sustaining before they go on the market is crucial to attracting a great buyer pool and getting the best offers once they are offered for sale.