According to the third quarter’s Market Pulse Quarterly Survey, 79 percent of M&A advisors representing deals of $5 million to $50 million categorized the current climate as a seller’s market. This is the strongest seller’s market sentiment reported in the lower middle market since the survey started in the second quarter 2012. On the other hand, 72 percent of Main Street brokers (values from $0 million to $2 million) representing deals of $500,000 or less reported a buyer’s market.
The Market Pulse Quarterly Survey Third Quarter 2013 Report, released today by the Pepperdine Private Capital Markets Project at Pepperdine University’s Graziadio School of Business and Management, International Business Brokers Association (IBBA) and M&A Source, evaluates market conditions for businesses being sold in Main Street (values from $0 million to $2 million) and lower middle market (values from $2 million to $50 million).
This quarter, private equity firms have tied existing companies as the number one buyer for businesses over $5 million in value. Private equity acquisitions were divided equally as 50 percent platform deals and 50 percent add-ons. As in second quarter 2013, individual buyers dominated Main Street.
“One explanation for why private equity firms are targeting deals that are valued over $5 million is that they have a lot of money to expend and funding larger deals allows them to be more efficient,” says IBBA director Scott Bushkie, president of Cornerstone Business Services. “That’s opening opportunities for smaller companies in the $2 million to $5 million sector—companies that might not be as competitive bidding against a private equity firm.”
In every segment, retirement was the number one reason sellers put their business on the market, indicating that Baby Boomers are continuing to move into the market in larger numbers. In every market segment, more than half of all advisors predict deal volume will grow in the next three months.
In the lower middle market, “better ROI than other investments” ranked first or tied for first as the number one reason buyers are active in the M&A market. For Main Street buyers, the number one motivating factor was to buy a job and control their own destiny.
“Buyers in the lower middle market continue to gain confidence in the economy and in their ability to grow a business,” says Dr. Craig Everett, an assistant professor of finance at the Graziadio School of Business and Management and director of the Pepperdine Private Capital Markets Project. “They believe that buying a business is the best way to put their money to work, versus starting an operation from the ground-up or investing in other areas. Despite the higher rate of retirement across every sector, demand remains high and sellers still have the advantage for higher value deals.”
Other key findings of the Market Pulse Survey Report
- Most advisors think valuations will stay the same or grow in the next three months. In the lower middle market, less than two percent of advisors believe valuations are going to decline. The majority believe they will stay the same, with 20 to 25 percent expecting they will continue to grow from current peak. As the deals get larger there is greater confidence that values will continue to increase.
- In three out of five sectors, median multiples were at a high, or tied for high, over the previous year. Multiples are markedly stronger in the lower middle market, correlating to a strong seller’s market sentiment because of the strong presence of private equity and existing companies poised for growth through acquisition.
- The Q3 2013 study continues to confirm earlier findings that larger businesses take longer to close. In the smallest Main Street sector (businesses valued at $500,000 or less), the median time to close was four months. In the lower middle market, for businesses valued over $5 million the median time to close was 10 months.
- In Q3 2013, 75 percent of the buyers for deals valued over $5 million came from outside a 100 mile radius of the seller’s location. For Main Street deals, 40 percent of buyers came from within a 20 mile radius.
- Personal services, restaurants, business services, and consumer goods/retail ranked among the most active industries for the Main Street market. In the lower middle market, for businesses valued between $2 million to $5 million, healthcare-related businesses led at 25 percent of completed deals over the last three months, followed by manufacturing and wholesale/distribution at 19 percent each. Manufacturing led the $5 million to $50 million sector at 31 percent.
The Market Pulse Quarterly Survey Third Quarter 2013 Report is available at bschool.pepperdine.edu/privatecapital
© 2013 PEPD • Private Equity’s Leading News Magazine • 12-12-13
