The 2023 Condition of the Private Business-for-Sale Marketplace From Insiders Including Valuation Disclosures

The William Bruce Report: The Condition of the Private Business-for-Sale Marketplace is a quarterly disclosure of national market conditions from insiders who are professional advisors to business buyers and sellers. William Bruce, the author of this report, currently serves as president of the American Business Brokers Association.

Because the small to medium size business-for-sale marketplace is comprised of non-public, closely held businesses with little public reporting required, information is often difficult to obtain.

One authoritative source of information for this 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 2023 first quarter survey was conducted April 1-19, 2023, and was completed by 371 business brokers and M&A advisors. Respondents completed 292 transactions this quarter.

Notable findings from the survey include:

Business Valuations

Small businesses continue to sell on-pace in early 2023, despite reports that global mergers and acquisitions (M&A) had suffered its weakest start in a decade. Respondents to the Market Pulse closed approximately the same transaction volume year-over-year.

Historically, business valuations hold steady in the Main Street market, with multiples from 2.0-2.8 times Seller’s Discretionary Earnings (SDE). The Main Street market is defined as businesses valued at up to $2 million.

The middle market covers larger businesses valued at up to $50 million. Fluctuations are more likely in the middle market valuations, as larger businesses become more or less attractive targets to financial and strategic buyers alike.

“We know that global M&A continues to be a challenging environment, and yet we aren’t seeing as big an impact in Main Street and the lower middle market. Small business owners shouldn’t let doom-and-gloom industry reports impact their outlook, as macro trends don’t always trickle down,” said Lee Sheaffer, President of BizReady, Inc. in Oakland, California.

The graph below depicts the selling price of businesses by size expressed as an average multiple of earnings.

For transactions up to $2 million in size, the valuations above are expressed as a multiple of the Seller’s Discretionary Earnings (SDE). For larger transactions, the valuation multiple is applied to Earnings Before Interest, Taxes & Depreciation (EBITDA).

Time to Close

Sales took slightly longer to close in the Main Street market, but closed faster in the middle market. Interestingly, the shift came entirely in the listing/marketing stage, as the time from a Letter of Intent (LOI) to close did not change.

This suggests Main Street businesses had a harder time finding a buyer, while middle market businesses were quicker to catch buyer interest.

The chart below compares the time to close a sale by transaction size for the first quarter of 2023 to the same quarter last year.

What Are They Buying?

In the Main Street market with companies appraised at up to $2 million, business services and consumer goods trended throughout the sector. In the middle market, construction/engineering and manufacturing dominated industry transitions.

Other Issues

Other information gleaned from the first quarter survey includes:

Asked about the top challenges to successful ownership transitions, survey respondents named unrealistic value expectations by the seller as the number one challenge across all transaction sizes. In the Main Street market, poor financial recordkeeping and questionable expense adjustments were also mentioned frequently. In the middle market, advisors pointed to current interest rate instability.
Year-over-year trends show a decrease in seller financing in the Main Street market. Meanwhile, transactions in the middle market leaned a bit heavier toward seller financing and other alternative financing arrangements.
Effective as of March 29, 2023, the National Broker Simplification Act went into effect exempting certain M&A brokers from registering as broker-dealers with the US Securities and Exchange Commission (SEC). The new law clears up a grey area and allows an M&A broker to engage in a securities transaction connected to the sale and purchase of an eligible privately held company.

In Summary

Despite questions in the national and world economies, the market for small to medium size businesses remains healthy and active. It’s in the much larger transactions that the issues in the macro economy are being felt.

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:

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