The William Bruce Report: The Condition of the Private
Because the private business-for-sale marketplace is comprised of non-public, closely held, small to medium size businesses with little public reporting required, information is often difficult to obtain.
One of the most authoritative sources of information for this private business-for-sale marketplace is the Market Pulse Survey conducted jointly by the International Business Brokers Association and the M&A Source. The membership of both organizations is comprised of full-time professionals in the private business-for-sale marketplace.
The 3rd quarter survey was conducted October 1-15, and was completed by 499 business brokers and M&A advisors. Respondents completed 452 transactions this quarter.
Confidence is dropping, but current valuations remain strong. Last quarter, advisors pointed to labor shortages as the biggest negative impact on mergers and acquisitions. Now that issue doesn’t even reach their top four concerns. Today advisors largely point to economic issues (inflation, interest rate hikes, and recession expectations) along with persistent supply chain issues as factors impacting the market.
And yet, despite concerns over market headwinds, advisors continue to report a strong influx of new engagements, despite being slightly less than last year. More than 50% said their number of clients “greatly increased” in the third quarter.
“Many sellers go to market when they’re tired or burned out,” said Bill Nicholson, owner of Sunbelt Dallas Metro. “Business owners haven’t had a ‘normal’ year since 2019. With headwinds still ahead, we could see a lot more Boomers calling it quits rather than weather any more unpredictability.”
As seen in the graphic below, multiples were steady or better in the third quarter in all but the highest value market sector.
But there are some shifts in the market according to one respondent. “There’s a widening gap between what a good quality company earns in a sale and what a company with a few warts or weaknesses will garner,” said Scott Bushkie, President of Cornerstone Business Services. “In uncertain times, buyers make a flight to quality. They’re bypassing riskier options and doubling down interest in established strong performers.”
Types of Buyers
The types of buyers in the private business-for-sale marketplace vary by the size of the businesses. For businesses with valuations under $1 million, the buyers were predominantly individuals who were essentially “buying a job.” Many were first-time business buyers and most were residents living within 50 miles of the business.
Above $1 million in value, the buyers tended to be financial or strategic buyers with Private Equity Groups and other large investors being active participants in this market segment. The location of the buyers in proximity to the company is of less importance in this portion of the market, as these kinds of buyers will customarily send in a management team.
Most Popular Categories of Businesses Being Sold
Construction/engineering firms topped the list of hot industries this quarter. Consumer goods/retail also had a strong showing in both the Main Street and lower middle markets. Manufacturing led in the highest value market sector.
Time to Close
Businesses are still selling briskly which is generally reflective of a strong market with motivated buyers. The chart below shows the median time from listing/engagement to closing.
“We’re in unusual times. Even though signs are pointing to a recession, there’s a record amount of capital ready to be deployed from both corporate and private equity buyers,” said Jeff Swiggett, President of VR Business Sales Mergers & Acquisitions. “While inflation and interest rates will have some effect on transactions, it won’t throttle them.”
Another survey respondent commented, “Interest rates are slowing some transaction closings, disqualifying some buyers and moving them to a lower range. But overall, there’s still significant cash available and the pool of buyers remains strong.”
Author’s disclaimer: William Bruce is a member of both the International Business Brokers Association and the M&A Source. He participated in this survey.
For further reading, here are additional articles on the issues of business valuation and ownership transfer:
- How to Use Valuation Guidelines to Estimate the Value of a Business
- What are the “Discretionary Earnings” of a Business?
- How to Analyze a Business You’re Considering Buying
- How to Make a Written CONTINGENT Offer to Buy a Business
- Seven Negotiating Rules When Buying or Selling a Business
- How to Conduct Due Diligence When Buying a Business
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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership. He currently serves as president of the American Business Brokers Association. His practice includes consulting services nationally on issues of business valuation and transfer. With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.