The Condition of the Private Business-for-Sale Marketplace From Insiders

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-sized 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 quarterly 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 second quarter survey was conducted July 1-16, 2023, and was completed by 413 business brokers and M&A advisors. Respondents completed 347 transactions this quarter. This is the 45th edition of the survey.

Notable findings from the survey include:

Greater Interest from PEGs and Individuals

Anecdotal evidence suggested advisors were fielding greater interest from private equity groups (PEGs) as well as individual buyers alike. Interest appears to be peaking among former C-suite individuals who generally have the net worth, the professional network, and the capabilities to consider business ownership. This quarter’s survey investigated that trend.

“We know pretty clearly what’s driving PEG activity in the Main Street and lower middle markets,” said Kyle Griffith, Managing Partner of The NYBB Group. “Increased demand for deals has many of these buyers moving down market to reduce competitive pressure. And the lending climate is such that it’s easier for these groups to find financing for smaller deals right now. Private equity will consider almost any deal size for a strategic add-on acquisition.”

Lending Environment Remains a Challenge

A question on the lending environment revealed widespread concern among respondents. Across all value segments, the majority (57-58%) perceived the lending climate to have worsened from Q1 to Q2 this year. Only a small percentage (3-4.5%) reported an improvement in lending conditions, indicating caution and potential obstacles for businesses seeking financing in the current market.

Business Value

Business valuations held steady in the Main Street market. Looking at the last three quarters, we see a stable trend. However, Q2 2023 median multiples in the $5-50MM enterprise value are down (Figure 6), year-over year, suggesting interest rates or other
factors are affecting the market as well as a rebound in the $2-5MM enterprise values. Buyers are paying much more in interest now. Thus, they either bought at a lower price or accepted smaller returns, and right now the lower price appears to be winning.

“The data indicates there has been some multiple compression in Q2
which is not unexpected. When interest rates rise, valuations are
negatively affected at some level,” said Scott Mashuda, an Ohio-based mergers and acquisitions advisor for larger transactions. “However, we expect the decline to be modest and short lived as large amounts of investable capital remain on the sidelines, ready to be put to work. This demand driven market should keep markets and valuation strong for the foreseeable future.”

Time to Close

The average time to sell a small business increased across most sectors, with a significant jump for businesses valued at $5 million or more. Of that time, roughly 60 to 120 days are spent in due diligence and execution after a signed letter of intent or
offer.

“The delays in the lower-middle-market can be almost entirely attributed to the current lending climate,” said Eric Gall, President and Founder of Edison Business Advisors. “Buyers are having to work much harder to pull together the money they require to complete a transaction.”

The Buyers

The data shows that first-time buyers are more active in the Main Street market, while strategic buyers and PE firms become more prominent as the transaction size increases. Buyer motivations also shift, with a focus on job acquisition in the lower value ranges and an increasing emphasis on strategic expansion in the higher value segments. Additionally, location preferences appear to shift with business values, suggesting that proximity to sellers may be more critical for smaller transactions.

<$500,000: Buyers in this sector were:
• First-time buyer (47%), or serial entrepreneurs (37%)
• Motivated to buy a job (42%), gain a horizontal add-on (23%)
• Located within 20 miles (64%) or more than 100 miles (16%) of the seller’s location

$500K-$1MM: Buyers in this sector were:
• First-time buyers (45%), serial entrepreneurs (30%), or existing companies (24%)
• Motivated to buy a job (40%), gain a horizontal add-on (29%)
• Located within 20 miles (59%) or within 50 miles (20%) of the seller’s location
$1MM-$2MM: Buyers in this sector were:
• Serial entrepreneurs (33%), strategic buyers (31%), first-time buyers (29%),
• Motivated to buy a job (33%), gain a horizonal add-on (25%), better ROI than other investment (23%)
• Located within 20 miles (50%) or more than 100 miles (23%) of the seller’s location

$2MM-$5MM: Buyers in this sector were:
• Strategic buyers (33%), serial entrepreneurs (30%), or first-time buyers (23%)
• Motivated to gain a horizontal add-on (40%), better ROI than other investment (21%), buy a job (19%)
• Located more than 100 miles (49%) or within 20 miles (30%) of the seller’s location
$5MM-$50MM: Buyers in this sector were:
• Strategic buyer (39%), PE firms seeking add-on (22%), or PE firms seeking platform (17%)
• Motivated to acquire a horizontal add-on (52%), vertical add-on (26%)
• Located more than 100 miles (70%) or within 20 miles (22%) of the seller’s location

$5MM-$50MM: Buyers in this sector were:
• Strategic buyer (39%), PE firms seeking add-on (22%), or PE firms seeking platform (17%)
• Motivated to acquire a horizontal add-on (52%), vertical add-on (26%)
• Located more than 100 miles (70%) or within 20 miles (22%) of the seller’s location

In Summary

Despite questions in the national and world economies, the market for small to medium size businesses remains healthy and active. It is 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: