The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project showed that business sales remained strong in 2015 especially in the Main Street market.
The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project showed that business sales remained strong in 2015 especially in the Main Street market. The Main Street market generally refers to smaller commercial establishments, so named because many are found in towns across the United States.
The Small Business Administration had a record year distributing more than $23.6 billion in loans in FY 2015. There was also significant private capital and traditional lending for the Main Street market in 2015 as 71 percent of Market Pulse study respondents who closed deals under $2MM in value reported that the businesses utilized financing other than SBA funds.
The SBA record year coupled with the traditional lending demonstrates how incredibly active for the Main Street market was in 2015.
The Q4 2015 survey which compares the conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM -$50MM) was completed by 348 business brokers and M&A advisors representing 38 states. Respondents completed 410 transactions in the 4th quarter of 2015.
The Market Pulse Survey showed that in Q4 2015 deals took longer to close across all sectors. Closing times nearly doubled in the Main Street market, while the Lower Middle Market also saw jumps of up to four months. New this survey, advisors reported on the average time for deals to move from letter of intent (LOI) or offer to closing. In every sector except the smallest, deals took three months to close after a signed LOI.
“Typically the larger the deal, the longer it takes to close,” says Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project. “But the lower middle market has a large number of active buyers, and one way buyers win deals is to show they can close more quickly. As more buyers come to the table, advisors are able to run a more efficient process.”
Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less.
“Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” added (your last name). “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015) whereas in the lower middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”
Additional Key Findings:
Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the Lower Middle Market.
Main Street businesses sold for approximately 91 percent of their asking price in Q4 2015. By comparison, Lower Middle Market businesses—which typically aren’t marketed with an asking price—received 99.5 percent of the internal benchmark set by the advisor and seller.
In the smallest deal category (businesses valued at <$500K) first time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5MM to $50MM) private equity made up the largest buyer group. PE groups were not active at all in the <$500K segment, while individual buyers accounted for only 14 percent (7 percent first time buyers, 7 percent repeat owners) of the larger sector.
Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the Lower Middle Market as well. Manufacturing companies led the Lower Middle Market.
About International Business Brokers Association (IBBA) and the M&A Source
Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org.
Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients’ needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org.
About the Pepperdine University Graziadio School for Business and Management
A leader in cultivating entrepreneurship and digital innovation, the Pepperdine University Graziadio School of Business and Management focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and executive MBA programs at our eight California campuses, as well as through online and hybrid formats. In addition, the Graziadio School offers a variety of master of science programs, a bachelor of science in management degree-completion program, and the Presidents and Key Executives MBA, as well as executive education certificate programs. Follow the Graziadio School on Facebook, Twitter at @GraziadioSchool , and LinkedIn.
Content provided by Evolution Advisors. If you have any questions or concerns regarding these matters, please do not hesitate to contact Evolution Advisors at 916-993-5433.
Disclaimer: This material was prepared for general informational purposes only, and is not intended to create an attorney-client relationship and does not constitute legal advice. This material should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a qualified attorney regarding any specific legal problem or matter.
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