Small Business Market: < $1MM EV
Hope on the Horizon: Q1 2023 Reports Unveil Promising Trends in Small Business Acquisitions Despite Economic Uncertainty
- The first quarter of 2023 saw a significant increase in small business acquisitions, indicating market-adjusted confidence among buyers
- Nearly one-third of business owners are accelerating their exit plans
- Small business acquisitions offer a stable investment option for buyers seeking reliable returns
The recently published 2023 Q1 market reports from BizBuySell offer valuable insights into current trends in the mergers and acquisitions market. Additionally, Calder Capital has reported its strong first-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.
The first quarter of 2023 saw a significant increase in small business acquisitions, suggesting that buyers are becoming more active in the market. After three consecutive quarterly declines, the volume of transactions rose by 4.8% compared to Q4 of 2022. While the number of deals remains 10% lower than the previous year, the median sale price increased by 1.4%, and by 11% compared to the previous quarter, according to the Insight Report from BizBuySell. These trends indicate market-adjusted confidence among buyers and a potentially favorable climate for small business sales.
Calder Capital and Small Business Deal Advisors report robust buyer interest in the market. As of March 31, 2023, 13 transactions have already closed, and the team has 27 deals under Letter of Intent (LOI). Sellers who are considering selling their businesses are receiving significant attention from interested buyers.
“Recently, we received 189 requests for information for one of our newer sell-side engagements in one day! This is a record for us and illustrates the continued strong interest from buyers for quality sellers.” – Max Friar, Calder Capital Managing Partner
According to BizBuySell, their online marketplace has experienced a significant surge in online traffic, with monthly visits increasing by 27% compared to the previous year. This noticeable increase indicates a growing interest in small business acquisitions.
In the wake of pandemic-related economic disruptions, almost a third (28%) of business owners are accelerating their exit plans. While retirement is the primary reason motivating 44% of owners to sell, burnout is driving 30% of them, and 21% cite economic uncertainty as a factor. With inflation and rumors of a looming recession dominating news headlines, many sellers are eager to capitalize on the post-pandemic financial rebound.
23% of the Q1 2023 closed deals from Calder Capital and Small Business Deal Advisors were closed by individual buyers. Nearly 54% were closed by strategic buyers. Small Business Acquisition opportunities offer a stable investment option for buyers seeking reliable returns.
“Amidst the challenging economic landscape marked by rising real estate costs and stock market volatility, buyers are increasingly finding value in small business acquisitions. Despite gloomy headlines, sellers can be confident that stable, profitable businesses will still attract serious buyers. With rising real estate costs in many locations and increasing market risks, investors are turning to businesses with a strong performance as a safe haven for their capital.” – Hannelore Green, Continuous Improvement Director
The recent interest rate hikes have made small business acquisitions more expensive for buyers, leading to increased negotiations for lower prices and putting pressure on business values. Despite these challenges, businesses sold in Q1 of 2023 reported stronger financials, indicating a positive trend in the market. Median revenue rose by 6.7% over the previous year, and median cash flow increased by 2.8%, reaching their highest levels on record. These figures suggest that consumer spending patterns are adapting to inflation and that there is a growing demand among buyers for businesses that continue to perform well. Despite the added cost pressures, the strong financial performance of small businesses may be reassuring to sellers looking to attract potential buyers.
“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
For sellers, it’s crucial to keep in mind that potential buyers will typically examine a business’s financial history over a period of at least three years. This review can heavily influence the buyer’s interest and decision-making regarding the business’s valuation. Consequently, selling a business with just one recent year of strong performance can be challenging. To increase the likelihood of multiple offers and strong competition among buyers, we advise demonstrating a period of 18-24 months of consistent financial growth and a healthy backlog. By positioning the business in this way, sellers can attract a greater number of interested buyers and achieve a more favorable valuation.
To get a better idea of how long your business will take to sell, it can be helpful to look at current market data. We can derive median days on market (MDOM) from BizBuySell’s Quarterly Insight Report data, which gives us an overall MDOM of around 200 days, or a little over six months. That number begins to vary when we look at different types of businesses.
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. Such businesses are highly sought after and offer a stable investment opportunity for potential buyers looking to navigate the challenges ahead.
About Market Update:
Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including BizBuySell’s Insight Report, IBBA and M&A Source’s Market Pulse, GF Data’s summary reports, 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.
Lower Middle Market: $1-10MM EV
Strong Seller Advantage Persists in Lower Middle Market Despite Decreased Sentiment
- Small and medium businesses continue to sell on pace in early 2023.
- High-quality companies in the market are anticipated to sustain a considerable level of buyer interest.
- Unrealistic seller expectations of business value continue to be the largest hurdle experienced in the lower middle market.
Before we dig into the industry data, it’s important to recognize that feelings do not necessarily reflect reality.
There have been a lot of negative headlines and interest rate increases over the past 18 months. As a result, many potential business sellers are feeling that it’s not a good time to sell. In fact, seller sentiment has remained at a decade-low since Q4 2022. The result that has followed is natural: there is a very low supply of high-quality businesses for sale.
In stark contrast, buyers are very aggressively seeking quality businesses. Calder Capital has reported significant interest from buyers throughout Q1 of 2023. Similarly, BizBuySell, shared that their online marketplace has experienced a significant surge in online traffic, with monthly visits increasing by 27% compared to the previous year. In short, supply is low and demand is high.
Below are some statistics from our internal reporting to provide a sense of what is happening in the market due to low supply and high demand.
The following are current clients that are selling their businesses and have accepted or are getting close to accepting an offer. Links to these sellers’ profiles are included.
Metal Finishing Company
Buyers requesting information: 120
Offers submitted: 12
Offers higher than valuation range: 3
Sheet Metal Fabricator
Buyers requesting information: 117
Offers submitted: 9
Offers higher than valuation range: 4
Commercial/Industrial Electrical Contractor
Buyers requesting information: 94
Offers submitted: 10
Offers higher than valuation range: 2
Rubber Product Manufacturer
Buyers requesting information: 255
Offers submitted: 8
Offers higher than valuation range: 3
Many sellers are receiving significant attention and competition resulting in premium valuations.
While we cannot predict the future, our data continues to support this narrative.
The market reports for the first quarter of 2023 provide valuable insights into the latest trends in the mergers and acquisitions landscape. Calder Capital has also released its financial and closed transaction results for the same period. Analyzing these reports can help prospective buyers and sellers gain a deeper understanding of the present market conditions, enabling them to make well-informed decisions regarding a potential business transition.
Small and medium businesses continue to sell on-pace in early 2023, despite findings that global M&A had suffered its weakest start in a decade.
Although the Lower Middle Market M&A is currently favoring sellers, with demand surpassing supply, it is noteworthy that the IBBA reports low seller sentiment. The seller sentiment levels are rivaling the numbers we saw during the pandemic and the period following the Great Recession. In times of high demand, sellers can find reassurance in the fact that buyers are actively competing to secure deals. As a result, this often leads to heightened valuations and more advantageous deal terms for sellers.
Calder Capital observed a strong level of buyer interest in Q1 2023. The team closed a total of 13 transactions and maintain 27 transactions under exclusive Letter of Intent (LOI). On-market sellers are attracting considerable attention from prospective buyers. “Recently, we received 189 requests for information for one of our newer sell-side engagements in one day” shared Max Friar, Calder Capital Managing Partner. “This is a record for us and illustrates the continued strong interest from buyers for quality sellers.”
According to the IBBA’s Market Pulse, buyers in various sectors are originating from diverse sources. First-time buyers dominate the $500k-$1MM range, accounting for 47% of buyers in that category. On the other hand, strategic buyers are most concentrated in the $1MM-$2MM range (41%) and the $5MM-$50MM range (57%).
Within the lower middle market sector, specifically under $2MM EV, 25-38% of buyers are motivated by the desire to “buy their job.” These buyers seek opportunities where they can acquire a business and take on an active role in its operation, effectively becoming their own boss through the acquisition.
As the debt markets have become more restrictive and expensive, platform buyouts are facing heightened challenges. As a result, larger companies are increasingly turning their attention to the lower middle market for add-on acquisitions and utilizing their existing debt facilities. Valuation multiples for transactions <$5MM EV have not shifted much. Quality businesses of all sizes are receiving multiple offers and valuations are remaining elevated in the lower middle market at this time.
The Fed’s quarterly Senior Loan Officer Opinion survey shows banks reported expecting to tighten standards across all loan categories. Reasons that are cited include deteriorating collateral values, a reduction in risk tolerance, and concerns about bank funding costs. The report showed “tighter standards and weaker demand” for commercial and industrial loans across all business sizes.
However, news and world events were of limited concern to sellers in the lower middle market according to the IBBA Market Pulse Executive Summary, which surveys 371 M&A advisors nationally.
Not shown: Reasons selected by 10% or less: Unrealistic Expectations – Time to Sell | Unrealistic Expectations – Buyer Type | High Customer Concentration
Unrealistic seller expectations of business value continues to be the largest hurdle experienced in the lower middle market. It’s important for business owners to know the value of their business in an on-market scenario. While many owners believe they are being proactive in getting valuations completed, it is crucial for owners to consider the in-market experience of the appraiser.
“Our team has seen an increase in instances where business owners are receiving poorly reasoned valuations,” commented Calder Managing Partner, Max Friar. “It is quite devastating when a firm chooses to provide a misleadingly optimistic figure instead of providing an accurate representation of what the business can truly expect in the market. That negligence results in retirement plans, livelihoods, vacation homes, and travel plans upended once an owner is ready to transition away from their business.”
Despite deal hurdles, the amount of interest in quality businesses on the market has led to faster transaction timelines. This is evidenced by the lack of change within the time from the letter of intent (LOI) to close. “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 Capital Senior Analyst, Jake McDonald.
During Q1 2023, construction/engineering businesses were in the top three industries purchased across sectors of $500k-$50MM. Furthermore, business services, manufacturing, and distribution businesses continued to sell at high volumes across the lower middle market during the same period.
Even with the prevailing uncertainty in the current economic climate, there remains a considerable level of interest among buyers to acquire businesses that have demonstrated their ability to endure and thrive in challenging markets.
About Market Update:
Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including the IBBA Market Pulse, the Federal Reserve’s Senior Loan Officer Survey, 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.
Middle Market: >$10MM EV
Q1 2023 Reports Middle Market M&A Activity Decline and Business Resilience Amid Economic Uncertainty
- High-quality companies in the market are anticipated to sustain a considerable level of buyer interest.
- Valuations in consumer sectors persist at healthy levels, indicating the ongoing strength of businesses in these industries.
- Despite experiencing reduced demand and production levels, the labor market continues to serve as a beacon of optimism.
Recently published 2023 Q1 market reports offer valuable insights into current trends in the mergers and acquisitions market. Additionally, Calder Capital has reported its first-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.
M&A activity experienced a significant decline compared to previous years due to the exerted pressures of interest rates and financial stability concerns in Middle Market transactions. KeyBanc Capital Markets announced Q1 2023 saw a transaction volume and value decrease of 13.1% and 48.4% YoY, respectively.
In its efforts to control inflation, the Federal Reserve remained focused on raising the benchmark Federal Funds Rate. In March, it peaked at its highest level since 2007 at 4.9%. This resulted in elevated expenses associated with financing, resulting in reduced attractiveness of M&A for potential buyers. It is anticipated that the Fed will remain flat for the next several months, however, there is still speculation that the Fed will raise rates another 25 basis points at the next meeting on June 14.
The trajectory of deal activity in the remaining period of 2023 is anticipated to align closely with the overall state of the economy. However, quality companies on the market are expected to continue to attract a high level of attention.
Calder Capital reported robust buyer interest in the market. As of March 31, 2023, 13 transactions have already closed, and the team has 27 deals under Letter of Intent (LOI). Sellers who are considering selling their businesses are receiving significant attention from interested buyers.
“Recently, we received 189 requests for information for one of our newer sell-side engagements in one day! This is a record for us and illustrates the continued strong interest from buyers for quality sellers.” – Max Friar, Calder Capital Managing Partner
Platform buyouts have encountered increased difficulty as the debt markets have become more restricted and costly. Consequently, larger companies are progressively exploring the middle market for add-on acquisitions, which can be funded using their existing debt facility.
Calder Capital saw this trend firsthand in the first quarter of 2023 with 77% of businesses being purchased by strategic and private equity buyers, and mostly bolt-ons. According to Calder Managing Partner, Max Friar, “Bolt-on opportunities in the $2-5MM EBITDA range that are performing well remain intensely sought after. Consolidators with mandates to grow continue to pay surprisingly high multiples for opportunities that fit within their investment theses. We have witnessed some buyers paying 1-2 turns of EBITDA higher than industry averages in the spaces of industrial distribution, specialty medical practices, and niche manufacturing”.
The Fed’s quarterly Senior Loan Officer Opinion survey shows banks reported expecting to tighten standards across all loan categories. Reasons that are cited include deteriorating collateral values, a reduction in risk tolerance, and concerns about bank funding costs. The report showed “tighter standards and weaker demand” for commercial and industrial loans across all business sizes.
The current market is being compared to the Mona Lisa. At first glance, the subject of the world-famous painting seems to be smiling. Look again and her smile fades. When it next reappears, it is a different sort of smile. Similarly, the economy reflects this duality, depending on how you look at it, there are positives and negatives across the board with no clear indication of what lies ahead.
Q1 2023 has felt continued relief in the labor market even as indicators of demand and production turned weak in late 2022. According to the Bureau of Labor Statistics April 2023 report, many sectors including healthcare, financial services, and government agencies report upward trends in employment. Employment has remained the same in major industries such as construction, manufacturing, wholesale trade, retail trade, transportation and warehousing, and more.
KeyBanc Capital Markets reported Q1’23 M&A transaction volume decreased year over year across all industry verticals. Consumer M&A activity declined slightly relative to the previous quarter but has retained healthy valuations overall, with median multiples increasing slightly compared to recent historical values.
This suggests that consumer spending patterns are adapting to inflation and that there is a growing demand among buyers for businesses that continue to perform well. Despite the added cost pressures, the strong financial performance of businesses may be reassuring to potential buyers.
“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
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, the Federal Reserve’s Senior Loan Officer Survey, CNN, 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.