Business brokers are optimistic when looking at 2014 as 87 percent project an increase in completed deals and the majority of advisors anticipate that overall deal volume will increase, according to the Fourth Quarter 2013 Market Pulse Quarterly Survey Report. This report evaluates market conditions for businesses being sold in the “Main Street” market (values under $2 million) and lower middle market (values $2 million to $50 million).
“It appears that 2014 is shaping up to be a perfect storm for M&A activity,” said Scott Bushkie, president of Cornerstone Business Services. “Valuations are staying strong, sellers are gaining greater leverage, and boomer retirement is driving sellers to market. We are also seeing stronger support from traditional lenders, and that is enabling more corporations, private equity firms and individual buyers to come to the table, increasing an already record-size buyer pool.”
Individual buyers, most of them first-time business owners, acquired smaller businesses at a much greater rate than larger financial firms at the end of last year. Existing companies had a larger presence in the $2 million to $5 million sector at 41 percent, but still trailed behind individual buyers at 47 percent. In the $5 million to $50 million sector, private equity groups were the primary players, representing 60 percent of closed transactions.
Given that individual buyers dominate the market for deals under $2 million, it’s not surprising that advisors cited “buying a job” as the number one reason driving Main Street buyers to market in the fourth quarter 2013. In the $2 million to $5 million sector, “horizontal add-on,” which is acquiring additional, but related businesses at the same level in the value chain, was the leading driver at 47 percent, followed by “buying a job” at 23 percent.
“The biggest mistake sellers make is clinging to unrealistic expectations when valuing their company,” says Dr. Craig Everett, director of the Pepperdine Private Capital Markets Project. “Business owners that are burnt out are also at a disadvantage because they lose their leverage in negotiations or end up liquidating their assets because they won’t wait for an extended sale period. It’s important for business owners to put a realistic market value on their company and to have the time and patience to wait for an equitable deal.”
According to the report, advisors reported three common hurdles to closing deals in 2013: 27 percent pointed to valuation issues, 19 percent cited financing issues, and 13 percent reported deal fatigue. Conversely, the biggest contributors to getting deals done in 2013 were clear price expectations (33 percent), a larger buyer pool (26 percent), more sellers in the marketplace (13 percent), and more aggressive financing (11 percent).
Other key findings:
- Larger deals took more time to close and they were also more likely to draw buyers from farther away. Forty-nine percent of sellers in the under $500,000 market found their buyer in the same city, while none of the buyers in the $5 million to $50 million market came from the seller’s hometown.
- As deals scaled larger, lenders contributed a larger percentage of financing. In the $5 million to $50 million sector, mezzanine financing increased significantly, rising from three percent in Q4 2012 to 26 percent in Q4 2013.
- Retirement was the number one reason driving sellers to market in all sectors except under $500,000 where burnout led the list. Burnout was the second most commonly cited reason for sale in all categories from $500,000 to $5 million. In the $5 million to $50 million deal range, acquisition was second place at 14 percent, followed by health (9 percent) and unsolicited offers (9 percent).
For a free copy of the Fourth Quarter 2013 Market Pulse Quarterly Survey Report which is published by the Pepperdine Private Capital Market Project (www.bschool.pepperdine.edu), the International Business Broker Association (www.ibba.org) and M&A Source (www.masource.org) click HERE.
© 2014 PEPD • Private Equity’s Leading News Magazine • 2-18-14