Monthly M&A Market Snapshot - January 2017

The International Business Brokers Association (IBBA) and M&A Source, in partnership with Pepperdine Private Capital Markets Project, and with the participation of Legacy Mergers & Acquisitions, have set a goal to provide quality information relating to M&A transactions.  This data is from the 2016 Q3 Market Pulse Survey.

In this month’s report, we will look at:

• Industry expectations on valuation multiples

• Potential impacts on supply and demand

• Average time to close a deal

• Primary reasons for owner exit and

• Buyer motivation

As you can see from the chart above, there is some expectation that business valuation multiples may rise over the next three months, but the overwhelming majority of intermediaries feel they will remain the same.  We are anxious to see what impact the election results may have on this chart in the coming months.   If the capital gains tax laws change significantly, we could see multiples decrease for some of these smaller transactions due to excess supply in the market.

Almost half of intermediaries feel business listings will increase, while less than 8% are expecting a decrease.  An increase in listings or supply could bode well for buyers as more businesses would be available for purchase.  This, in turn, could lead to oversupply and have downward pressure on business multiples for sellers.

Eight months is the average time from listing to close for main street type businesses (under $5MM), which is down slightly as compared to recent reports.  This average falls in the historically normal range of 8 to 10 months.  The SBA (Small Business Administration) lending process has become more streamlined in the last 12-18 months and this may be a leading cause for the slight drop in the listing to closing average time.

Retirement remains the primary driver for business owners to sell their businesses.  For companies under $1MM, an increase in owner burnout was observed as compared to previous reports.  This increase, however, is not completely a surprise as owners of smaller companies typically manage multiple roles in their businesses due to lack of cash flow required to hire a management team.  

For “Main Street” companies ($5MM and under), clients on the buy side are typically “buying a job”.  These are many times mid to upper managers who have grown tired of the corporate politics.  They are ready to give it a go on their own and try to find somewhere they can act as the primary decision-maker.  It is also no coincidence that $5MM is the maximum amount for an SBA loan, which is one of the primary vehicles used to make acquisitions on Main Street.

Overall, there have only been small changes from the last Market Pulse Survey results published earlier in 2016.  One of our primary metrics that we follow for our clients is anticipated change in future multiples, so we’ll keep a close eye on that and report out those results and end of the quarter.

Thank you for reading our Monthly M&A Snapshot.  Please email us at [email protected] or visit our website www.LegacyMergers.com if you have questions or would like additional information.