Calder Capital Market Remarks Q2 2021

Trending: #TheGreatQuitof2021 #laborshortage #supplychain #burnout

All things considered, the first quarter of 2021 started out pretty well for small M&A deals, and Q2 continued to show seller appetites returning, albeit still at multi-year lows. What’s apparent, however, is a lot of shifting in the landscape of the market in terms of demand, motivations for selling, and labor shortages and supply chains prompting business owners to make some unforeseen adaptations, and sometimes that means selling before they planned.

Caption: As the chart shows, despite a sharp recovery from the depths of COVID-stricken Q2 2020, small business transactions have fallen in sum each year since 2018.

Demand for Businesses Shifting into the Restaurant Industry

Especially with a lot of manufacturing company owners waiting out the market for their valuations to have a chance to go back up, and with “normalcy” beginning to return, there has been a higher supply and demand for restaurants and service business acquisitions. 

“The increase in closed deals happened almost exclusively with restaurants and retail,” remarks Max Friar, Managing Partner at Calder Capital. “Service business and manufacturing business sales were up 1% and down 9%, respectively. This is so interesting to me because this is basically exactly what we experienced. At the end of Q1, Calder had closed 9 deals and Small Business Deal Advisors (SBDA – which handles smaller retail and restaurant opportunities) had closed 3. In Q2, Calder closed only 1 deal and SBDA closed 6.” Looking forward, continued Friar, “It looks like that’s going to flip again in Q3. Calder has already closed 4 deals in July with 10 under LOI.”

Restaurant acquisitions are up 17% vs. the first quarter of 2021.

According to Bizbuysell’s Q2 report for 2021, “The first half of 2021 reflects a shift in demand. Now with restrictions relaxed across most industries, rather than compete for a limited supply of strong performing businesses, buyers are broadening interest in re-opening sectors such as restaurants, bars, and other retail businesses. These businesses are responsible for the transaction growth in Q2, with restaurant acquisitions up 17% and retail businesses up 14% compared to the first quarter.”

Noted Friar, “From a macro level, the same trends persist: few high-quality sellers are driving a lot of competition among buyers. I think this will continue despite more sellers, particularly manufacturing companies, emerging during the latter part of the year.”

While they haven’t quite returned to pre-pandemic levels, the M&A sale multiples for small businesses have been rising back to historic norms. Source: IBBA

Buyer Interest Remains High

What has remained the same from Q1 to Q2 is a higher number of buyers than sellers. Demand is staying high, which, combined with a few other variables, might make it an ideal time to sell, at least for some businesses.

According to Sam Scharich, Calder’s Director of Buy-Side Services, “Buyer interest remains at record highs – this is backed by data from the number of inquiries we have been receiving on deals. Direct outreach to potential sellers remains highly effective in terms of starting conversations especially with the seller that has been on the sideline for the last year and a half, primarily due to the uncertainty with the pandemic, taxes, and perhaps due to decreased business performance during this time.”

The number of sellers, however, is still at multi-year lows, which makes selling now a good time. “There has been no shortage of buyers in the market even as the pandemic has disrupted nearly every aspect of the economy,” notes Friar. “While listing supply has been limited and slow to follow, this has presented a tremendous opportunity for some owners to get out on top.” 

Retirement & burnout – often synonymous – lead the reasons that owners wish to exit their business in 2021. Source: IBBA

Interpretation of 2020 Financials Complicating Transactions

2020 Financials continue to be blurry representations of businesses’ overall performance and health. While those “pandemic-proof” companies that outdid themselves in 2020 have been popular, sellers are now a bit more inclined to look at a business’ recovery potential than its fluke year. 

At the same time, 2020 financials that look terrible make buyers and lenders nervous and often prompt inaction rather than low-ball offers. 

“I keep hearing buyers’ concern regarding 2020 being implemented into valuations,” says Garrett Monroe. “A lot of buyers are throwing 2020 out the door from a valuation perspective.”

While 2020 data may not be able to be taken at face value the way a typical fiscal year would be, however, it might still be worth keeping in the overall picture, with proper context. Comments Friar, “I feel that the top performers may need to show a strong 2021 to ‘legitimize’ their strong 2020. Buyers and lenders of Main Street and Lower Middle Market businesses seem to consistently prefer steady performers, even versus stellar growth.”

Labor Shortages and Supply Chain Problems Affecting Business Operations

Many business owners have had to shorten their operating hours and raise prices due to the labor shortage and the supply chain delays and cost increases. While the supply chain foremost affects the manufacturing industry, other businesses are feeling the ripple effect. 

Whether it’s due to government money coming in, getting too used to working from home and the flexibility that comes with that, or the global pandemic causing a global existential crisis, a high percentage of workers are resigning, and companies across industries are struggling to re-hire. 

What’s bad news for businesses might be good news for M&A or for sellers, however. Many of the individuals leaving their jobs are seeking entrepreneurship, often in the form of acquiring an established business. “Younger buyers are wanting control over their careers by owning their own business, where they are not subject to an employer’s success or failure,” notes Friar.

Younger buyers are looking to work for themselves rather than be reliant upon someone else’s success or failure.

“Investing in small businesses is a great way to diversify personal portfolios with how inconsistent and variable the real estate market and commodities are right now,” says Garrett Monroe, Mergers & Acquisitions Advisor at Calder. “ The market is aggressive right now with many buyers looking to deploy capital.” Especially as previously employed individuals are seeking out more financial independence outside of a corporate job, this is becoming a popular means of attaining that goal.

Looking Ahead: More Business Owners Seeking Acquisitions in the Near Future

We can expect quite a bit of burnout on the part of many business owners. After white-knuckling through a year of shutdowns and economic uncertainty, and now with residual shortages and labor struggles, many business owners are tired and ready to let go. 

“The overarching tailwind is the number of Baby Boomers who still own businesses. These Boomers will need to sell over the next few years. Most owners wanted to navigate the pandemic but now face a time where labor shortages are stifling further business growth and some of the fun of business ownership. For that and other reasons, older business owners will decide it’s time to move on,” says Matt Baas, M&A Advisor at Calder and co-owner of Small Business Deal Advisors.

As always, for owners who are looking to sell at some point down the road, it’s never too early to begin strategizing in order to set themselves up for the maximum valuation possible. “If you are thinking about selling in the next 2-3, start preparing now,” advises Scharich. “At the bare minimum, have our team conduct a valuation for you so you understand a) where you are at and b) what you can do to improve the valuation until you are ready to sell. Proactive sellers are the most rewarded in a transaction.”

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