Market Update – Q2 2023

Various M&A market reports for the second quarter of 2023 provide valuable insights into the latest trends in the mergers and acquisitions landscape. Calder Capital and Small Business Deal Advisors have also released its financial and closed transaction results for the same period. Reviewing these reports provides prospective buyers and sellers with an understanding of current market conditions for informed business transitions.

Q2 small business acquisitions surged 8% sequentially, building on a 4.8% Q1 rise, sustaining a positive trend. This indicates market-adjusted confidence among buyers and a potentially favorable climate for small business sales.

While acquisition volume has increased, seller sentiment remains low, on par with levels observed post-pandemic and after the Great Recession. Despite rising interest rates, fewer sellers entering the market due to negative perceptions have created a rather strong seller’s market. When it’s a seller’s market, sellers have the upper hand – it’s the prime time to sell. There are more eager buyers than great deals out there, so buyers end up competing to seal the deal. This results in better prices and terms for the seller.

Calder Capital observed a strong level of buyer interest in the first half of 2023. The team closed a total of 24 transactions and ended the quarter with 31 clients under exclusive Letter of Intent (LOI).

“I have been in small M&A for 18 years,” noted Calder Managing Partner Max Friar, “Never before have I seen such competition for quality sellers. Most sell-side clients with $1M+ in EBITDA are receiving 10-15 offers, many of those strong offers. 2023 has transformed into one of the best-seller markets I’ve ever witnessed and that is not what I expected heading into the year!”

The trend of favoring entrepreneurship over the typical 9-to-5 is on the upswing. Among surveyed buyers, 46% expressed a desire to transition from their current jobs to attain greater control over their future. An additional 13% who are recently unemployed share the same aspiration.

Speaking of buyers, let’s discuss what buyers “look like” based on deal size. 

According to the IBBA’s Market Pulse, Buyers in the <$500,000 EV range were:

• First-time buyers (47%) or serial entrepreneurs (37%)
• Motivated to buy a job (42%) gain a horizontal add-on (23%) 
• Located within 20 miles (64%) or more than 100 miles (16%) of the seller’s location 

Buyers in the $500k-$1MM sector were:

• First-time buyers (45%), serial entrepreneurs (30%), or existing companies (24%) 
• Motivated to buy a job (40%) or gain a horizontal add-on (29%) 
• Located within 20 miles (59%) or within 50 miles (20%) of the seller’s location

With debt markets tightening and costs rising, platform buyouts encountered increased hurdles. Consequently, larger firms are focusing more on the small business market for add-on acquisitions, leveraging their existing debt facilities or cash reserves.

While the average number of months to close from engagement has gone up slightly year-over-year, the average number of months from LOI to close remains consistent for small business acquisitions. Conversely, the middle market has experienced a notable rise in the period between engagement and closure.

“Economic uncertainty and job dissatisfaction often result in surges of entrepreneurial activity. That combined with favorable changes via SBA lending programs will likely lead to a continued uptrend at the smaller end of the market” shared Michael Donnelly, Analyst and Business Development Associate at Calder’s sister company, Small Business Deal Advisors.

Small business valuations have continued to be stable, as evidenced by a consistent trend over the past three quarters. Year-over-year trends show an increase in cash at closing (represented by buyer equity and senior debt combined) of about 3-4% for acquisitions completed under $1MM.  Quality businesses continue to receive multiple offers and valuation multiples continue to stand firm despite negative headlines and rate hikes. 

In late July, the Federal Reserve raised interest rates for the 11th occasion since March 2022, resulting in the target federal funds rate spanning 5.25% to 5.50%. According to ADP, the private sector added 497,000 jobs in the month of June, more than double the Dow Jones consensus estimate of 220,000. The lack of progress in the Fed’s goal of cooling the job market is an influential factor in additional hikes.

Despite interest rate increases and capital expenses on the rise, there’s promise of continued business-on-market supply. Experts have been calling for a “Silver Tsunami” of Baby Boomers exiting small business ownership. In fact, 47% of surveyed sellers gave retirement as their motivation and 34% cited burnout.

“Many baby boomers are simply feeling worn out and ready to sell, economic worries aside. Those who weathered the storm of the Great Recession and the pandemic have become adept at adapting and are doing so whenever possible.” -Hannelore Green, Continuous Improvement Director

In Q1 2023, construction/engineering businesses ranked among the top three industries acquired in deals under $1MM. This trend persists within the $500k to $1MM range. However, in transactions below $500k, restaurants have now taken the lead.

In Q2, restaurants that were sold exhibited higher revenue, commanding increased prices from buyers. The median sale price rose by 15.9% over the previous quarter and 6.7% over the previous year, with median revenue up 10% over the previous quarter and 11.3% year-over-year.

Despite the economic uncertainty, a significant interest persists among buyers seeking businesses that have showcased resilience and success in tough market conditions.

Calder Capital typically assists businesses with enterprise values exceeding $1MM. Small Business Deal Advisors, LLC is a sister company with common ownership that offers a discounted commission M&A service offering for smaller businesses. If you would be interested in learning more or listing your business through SBDA, please visit the Small Business Deal Advisors website.

If you would like to view Small Business Deal Advisors’ Listings, please do so here: Small Businesses for Sale.

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including the IBBA Market Pulse, BizBuySell, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights and analysis on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our actionable advice is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.

Recently published 2023 Q2 market reports offer valuable insights into current trends in the mergers and acquisitions market. Additionally, Calder Capital has reported its second-quarter financial and closed transaction results. By examining these reports, potential buyers and sellers can gain a better understanding of the current market conditions and make informed decisions regarding their business strategies.

While larger Middle Market deal activity slowed, small and medium businesses continue to sell on-pace throughout the first half of 2023. In addition to the marketplace date, the Calder/SBDA team closed 24 transactions in Q2 2023 and closed out on a record quarter. 

Despite lower confidence levels from sellers in the market,  high demand and low supply are driving a sellers’ market. Sellers that are choosing to sell presently are receiving a lot of attention from buyers.

“I have been in small M&A for 18 years,” noted Calder Managing Partner, Max Friar, “Never before have I seen such competition for quality sellers. Most sell-side clients with $1M+ in EBITDA are receiving 10-15 offers, many of those strong offers. 2023 has transformed into one of the best-seller markets I’ve ever witnessed and that is not what I expected heading into the year!”

In late July, the Federal Reserve raised interest rates for the 11th occasion since March 2022, resulting in the target federal funds rate spanning 5.25% to 5.50%. According to ADP, the private sector added 497,000 jobs in the month of June, more than double the Dow Jones consensus estimate of 220,000. The lack of progress in the Fed’s goal of cooling the job market is an influential factor in additional hikes.

Business valuations held steady according to the IBBA’s Market Pulse. Looking at the last three quarters, we see a stable and rising trend despite chatter in the marketplace and fears of a looming recession.

<$500K – $2M enterprise value is typically reflected as multiple of SDE (sellers discretionary earnings); $2M-$50M enterprise value is typically reflected as multiple of EBITDA

 “We are seeing businesses that have maintained or improved performance through recent years achieving higher than typical levels of interest and selling for healthy multiples. The market remains strong for resilient businesses,” shared Calder M&A Advisor, Jake McDonald.

According to the IBBA’s Market Pulse, which surveyed 413 M&A advisors nationally, buyers in various sectors are originating from diverse sources. Strategic buyers are presently accounting for about 30% of activity in the $1MM-$5MM sector. 

Based on deal size, it is important to know your buyer:

Buyers in the <$1MM-2MM sector were:

• Serial entrepreneurs (33%), strategic buyers (31%), first-time buyers (29%), 
• Motivated to buy a job (33%), gain a horizontal add-on (25%), better ROI than other investments (23%) 
• Located within 20 miles (50%) or more than 100 miles (23%) of the seller’s location Buyers in 

Buyers in the <$2MM-5MM sector were:

• Strategic buyers (33%), serial entrepreneurs (30%), or first-time buyers (23%) 
• Motivated to gain a horizontal add-on (40%), better ROI than other investments (21%), buy a job (19%) 
• Located more than 100 miles (49%) or within 20 miles (30%) of the seller’s location 

During Q1 2023, construction/engineering businesses were in the top three industries purchased across sectors of $1MM-$50MM. This trend persists across the market throughout Q2 of 2023. Furthermore, consumer goods/retail and business services continued to sell at high volumes across the lower middle market during the same period.

Increased demand within the construction/engineering industry is creating healthy valuations and encouraging longtime owners to sell. The $1.2 trillion Infrastructure Investment and Jobs Act, signed into law back in November 2021, allocated funds for roads, bridges, and major projects, and reauthorized the surface transportation program for the next five years. By the fourth quarter of 2025, there will be 872,000 more jobs as a result of the IIJA, according to Moody’s Analytics. Over half of these new jobs (461,000) are in the construction industry.

While transactions have remained resilient in the $1-10MM EV sector, it’s crucial to uphold a proactive approach amidst economic uncertainty. Strategies such as evaluating potential methods to bridge valuation gaps and implementing creative closing structures with earn-outs or seller notes can expedite timelines, enhance closure certainty, and increase overall value.

No matter the complexities of your transaction, Calder’s experienced Buy-Side & Sell-Side teams are equipped to guide you through the process, ensuring that you make informed decisions and employ expertise to cross the finish line.

Overall, the M&A landscape in Q2 2023 showcases a complex interplay of factors that are shaping the decisions and sentiments of buyers and sellers alike. 

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports and resources including the IBBA Market Pulse, the ADP Employment Report, the White House’s briefings, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights and analysis on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our actionable advice is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.

Newly released market reports for Q2 2023 provide insight into prevailing trends within the mergers and acquisitions landscape. Furthermore, Calder Capital has reported its second-quarter financial and closed transaction results. Reviewing these resources assists prospective buyers and sellers to deepen their understanding of the present market dynamics, enabling them to make well-informed choices about their business approaches.

M&A activity for businesses in the >$10MM EV sector has slowed. Reports from across the market illustrate that deal value and volume have weakened the larger a deal is in Q2 2023.

In late July, the Federal Reserve raised interest rates for the 11th occasion since March 2022, resulting in the target federal funds rate spanning 5.25% to 5.50%.

Value and volume decreases in the Middle Market are believed in part to be linked to the existing lending environment. Buyers are having to consider alternate financing options and work much harder to come up with the necessary funds to execute transactions. Many buyers are paying much more in interest now, resulting in lower offers.

Due to tightening debt markets and escalating expenses, platform buyouts faced heightened challenges. As a result, bigger corporations are increasingly concentrating on the small business and lower middle market sectors for add-on acquisitions.

The trajectory of deal activity in the remaining period of 2023 is anticipated to align closely with the overall state of the economy for businesses in the Middle Market sector. However, quality companies on the market are expected to continue to attract a high level of attention. 

“Despite the headlines of ‘doom and gloom’, we are seeing businesses that have maintained or improved performance through recent years achieving higher than typical levels of interest and selling for healthy multiples. The market remains strong for resilient businesses, specifically in the manufacturing, distribution, and business services sectors.” – Jake McDonald, Senior Analyst

Calder Capital reported robust buyer interest in the market. The team closed a total of 24 transactions and ended the quarter with 31 clients under exclusive Letter of Intent (LOI). Sellers who are considering selling their businesses are receiving significant attention from interested buyers.

$5MM-$50MM EV

The average time to sell businesses with EV of $5MM+ rose by about 3 months, YoY. Of that time roughly 60 to 120 days are spent in due diligence and execution, after a signed letter of intent or offer. 

The 2023 Q2 trends reveal a decline in seller confidence when compared year-over-year which could be attributed to market challenges, including elevated interest rates, stricter lending practices, and concerns of a soft recession looming.

Strategic acquirers continue to dominate middle market M&A activity according to the IBBA Market Pulse, which surveyed 413 M&A advisors nationally. According to the survey, in the $5MM-$50MM EV sector, 39% of deals were closed by strategic buyers. 22% of closings were attributed to PE firms seeking an add-on deal, and 17% of buyers were PR firms seeking platform. 

As for motivations in the $5MM-$50MM EV sector, the Market Pulse reported that 52% of buyers were motivated to acquire a horizontal add-on while 26% were motivated to acquire a vertical add-on.

During the first half of 2023, construction/engineering businesses earned the top spot in industries purchased across sectors of $5MM-$50MM. 

Increased demand within the construction/engineering industry is creating healthy valuations and encouraging longtime owners to sell. The $1.2 trillion Infrastructure Investment and Jobs Act, signed into law back in November 2021, allocated funds for roads, bridges, and major projects, and reauthorized the surface transportation program for the next five years. By the fourth quarter of 2025, there will be 872,000 more jobs as a result of the IIJA, according to Moody’s Analytics. Over half of these new jobs (461,000) are in the construction industry.

Additionally, Business Services are fairing well in the marketplace, however, transaction volume is down significantly in 2023 compared to previous years.

U.S. M&A Activity By Value

The report also indicated that industrial M&A deal activity declined in Q2 as inflation concerns and economic uncertainty persisted throughout the quarter in businesses. Deal activity will likely stabilize as acquirers look to fill strategic gaps in technology and capabilities. Year-over-year, there was a minor rise in healthcare deal activity, which has shown resilience despite challenges from regulations and the economy. However, deal value saw a decrease in this sector. 

GF Data reported in Q2 2023, deal flow remained constrained, debt pricing surged, and there’s a notable gap between prices paid for top performers and everyone else, some of which are likely holdovers from prior quarters negotiated down.

While the current economic climate remains uncertain, there is still significant interest from buyers in acquiring healthy businesses that have proven their resilience and strength in the face of adversity. 

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including KeyBanc Capital Markets Report, GF Data, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our analysis is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.