Brief Update on State of the Lower Middle Market – Q1 2019

The IBBA’s Q1 2019 Market Pulse recently came out and I wanted to share with you a quick synopsis of the findings.

In my opinion, the Market Pulse is one of the most insightful reports on the state of the market and includes the aggregate results of surveys conducted in April 2019 of nearly 300 M&A Advisors. Insights include deal multiples, deal structure, types and motivation of buyers, the timing of the sale, and general commentary from advisors. 

Here is the report: IBBA Market Pulse.

A couple of highlights:

Success Rate: Nearly half (48%) of businesses that come to market do not sell. Our experience reflects the insights of the commentary: “You need to come to market with well-organized records, realistic expectations and a committed team who will keep the process moving forward.” (Page 3). Historically, the businesses that we have represented that have not sold are due to price expectations that are out of line with the market, persistently declining sales/earnings and/or poor record-keeping.

Timing of Sale: The average time to close a deal is 8.8 months. The range is 8-11 months (Page 5). This is fairly consistent with our experience, however, there are factors (primarily geography and overall marketability – owner dependence, customer concentration, profitability) that can dramatically affect this range.

Sentiment: Sentiment continues to favor sellers; however, advisor confidence in this regard continues to decline slightly (Page 6). One difference we have experienced this year as opposed to 2017-2018 is a bit of a selective slowing across manufacturing, particularly in tool & die and some machining. It is difficult to tell whether this is a trend, however, it is apparent after dozens of prospect and client meetings in the manufacturing realm that many companies are slower than they want to be.

Deal Multiples: Overall, sale multiples continue to trend slightly downward from their 2017 peaks (Page 7). We have not necessarily seen this.

Cash is King: Cash at closing remains strong, reducing the amount of seller financing that can be expected (Page 8). Strategic buyers continue to have a fair amount of cash on their balance sheets. Additionally, changes in the 2018 SBA 7a lending rules contribute to more cash at closing.

Overall, the report is a mixed bag: cash at closing and the timing of deals show slight improvement, while deal multiples and seller sentiment show a slight decline.

Calder continues to feel good about the West Michigan and Northern Indiana markets. Businesses are generally showing strong profits and buyers remain eager to find a great business, however, hints of a slowdown may be on the horizon.

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Calder Capital, LLC