LOS ANGELES--(BUSINESS WIRE)--The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Markets Project found that retirement is the number one reason sellers go to market, but the type of buyer varies with business size as does the approach for ensuring a successful transaction.
In the smallest deal category (businesses valued at under $500K) first-time buyers accounted for the largest buyer segment at 43%. More than half (51%) of buyers in the Main Street market are motivated by a desire to buy a job. That is, the buyer is looking to leave corporate America and be active full-time in the business. It is critical for these buyers to have a clear understanding of the business costs and the current owner’s lifestyle.
On the other hand, buyers in the lower middle market are more often expanding an existing business through a horizontal or vertical add-on. In the largest deal category (businesses valued between $5 million to $50 million), private equity firms comprised the largest buyer group representing 43% of buyers. Larger businesses are typically purchased by educated and professional buyers who are interested in acquiring the company’s current labor force, property, and customer base.
“As the economy improves and more people come to market to sell their businesses, it’s critical that sellers have the right strategy,” said Scott Bushkie, CBI, M&AMI, President of Cornerstone Business Services and IBBA Chair. “Smaller businesses should always come to market with a purchase price whereas larger businesses should not. Instead they should focus on ensuring that all of their records and financials clearly show their profit and margins.”
The Q1 2016 Market Pulse Survey - comparing the conditions for businesses being sold in Main Street (values $0-$2 million) versus the Lower Middle Market (values $2 million-$50 million) - was completed by 370 business brokers and M&A advisors representing 40 states. Respondents completed 339 transactions in Q1 2016.
The quarterly survey also found that as the deal size increases, buyers are sourced from a wider geographic area. For example, 62% of buyers of companies valued between $5-50 million were located more than 100 miles away. Among smaller businesses, 68% were highly localized buyers meaning they were located within 20 miles of the company they bought.
“Across the board, the biggest reason deals fail is because buyers have unrealistic expectations,” said Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project. “Buyers that are most prepared and those that do their due diligence are more likely to close a deal. Employing the right strategy will dictate whether sellers have multiple offers when they go to market or whether their business sits idly waiting for a buyer.”
Other key findings:
- Main Street businesses sold for approximately 92% of their asking price in Q1 2016. This is a slight improvement over the previous quarter. Meanwhile, businesses in the lower middle market—which typically aren’t marketed with an asking price—received 94% of the internal benchmark set by the advisor and seller.
- The average time to close has stayed relatively flat, averaging 6.5 months in the Main Street market and 9 months in the lower middle market. Of that timetable, roughly 60 to 90 days is spent in due diligence, after the seller accepts a letter of intent.
- After retirement the leading reasons for selling a business include burnout and family issues.
- In the Main Street sector, restaurants led the pack by representing 22% of all reported deals followed by personal services at 18%, and consumer goods at 13%. Manufacturing led in the lower middle market again (as it did in Q4 2015), representing 37% of all reported deals in that sector.
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 of 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 five Southern California locations and at our Silicon Valley, Santa Barbara, and Dallas 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.
