Market Pulse Quarterly Report Shows 2015 Ended With Strong Sales of Businesses and Optimism is Growing for 2016
The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project showed that business sales remained strong in 2015 especially in the Main Street market. The Main Street market generally refers to smaller commercial establishments, so named because many are found in towns across the United States.
The Small Business Administration had a record year distributing more than $23.6 billion in loans in FY 2015. There was also significant private capital and traditional lending for the Main Street market in 2015 as 71 percent of Market Pulse study respondents who closed deals under $2MM in value reported that the businesses utilized financing other than SBA funds.
The SBA record year coupled with the traditional lending demonstrates how incredibly active for the Main Street market was in 2015.
The Q4 2015 survey which compares the conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM -$50MM) was completed by 348 business brokers and M&A advisors representing 38 states. Respondents completed 410 transactions in the 4th quarter of 2015.
The Market Pulse Survey showed that in Q4 2015 deals took longer to close across all sectors. Closing times nearly doubled in the Main Street market, while the Lower Middle Market also saw jumps of up to four months. New this survey, advisors reported on the average time for deals to move from letter of intent (LOI) or offer to closing. In every sector except the smallest, deals took three months to close after a signed LOI.
“Typically the larger the deal, the longer it takes to close,” says Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project. “But the lower middle market has a large number of active buyers, and one way buyers win deals is to show they can close more quickly. As more buyers come to the table, advisors are able to run a more efficient process.”
Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less.
“Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” added (your last name). “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015) whereas in the lower middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”
Additional Key Findings:
- Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the Lower Middle Market.
- Main Street businesses sold for approximately 91 percent of their asking price in Q4 2015. By comparison, Lower Middle Market businesses—which typically aren’t marketed with an asking price—received 99.5 percent of the internal benchmark set by the advisor and seller.
- In the smallest deal category (businesses valued at <$500K) first time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5MM to $50MM) private equity made up the largest buyer group. PE groups were not active at all in the <$500K segment, while individual buyers accounted for only 14 percent (7 percent first time buyers, 7 percent repeat owners) of the larger sector.
- Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the Lower Middle Market as well. Manufacturing companies led the Lower Middle Market.
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 for 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 eight California 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.
The 3rd quarter 2015 Sellability Tracker showcases survey results based on business’s completing The Sellability Score Survey, an interactive tool offering a comprehensive assessment of the “Sellability” of a business. Completing the Sellability questionnaire gives you an overall Sellability Score out of 100, plus your score on the eight key drivers of Sellability, which are statistically proven to increase the value of your company.
The average offer multiple of earnings for owners completing the survey for Q3 2015 was 3.76. Below are a few Q3 highlights from a few of the 8 key drivers that have an affect on how Sellable a Business is and on Multiples of Earnings from buyer’s offers. How Sellable is your business?
Multiple of Earnings
Q3 2015 Sellability Tracker Average is 3.76
|3.99||If your business is geographically scalable|
|4.03||Companies that offer little or no customization to their product or service get somewhat higher offers.|
Owner Relationship with customer
|Owner knows each customer by first name
Owner does not know customers personally and rarely gets involved in serving an individual customer.
How Easy Would It Be To Accommodate 5 X Demand?
Businesses with recurring revenue > than 50% of total revenue get more offers and higher multiples.
|12.29% of surveyed received offers (average)
17.56% with recurring revenue > than 50% of revenue received offers
|< than 1m in Revenue
1-3m in Revenue
3-10m in Revenue
10m+ in Revenue
|Bring shoebox of receipts to CPA at years end
Use accounting software product like QuickBooks
Review and Engage accounting audit in place
Overall Sellability Score
The Sellability Score algorithm was developed using a quantitative survey of business owners and is continually refined, based on the thousands of business owners who get their score each quarter. Achieve a Sellability Score of 80+ and – based on research from thousands of test cases – your company will be worth 71% more than the average business. To learn more about how to improve the Value of Your Business visit Evobizsales.com or call Evolution Advisors in the Roseville/Sacramento area at 916-993-543.Read More
As reported in BizBuySell’s recent Q3 2015 Insider’s Report the number of business transactions in the 3rd quarter of 2015 are down. This is compared to the markets record high level in 2014. Bob House, Group GM of BizBuySell.com andBizQuest.com said “After a very active 2014, this year’s small drop in transactions should be viewed as a stabilization of the market rather than a trend in the opposite direction. Overall, the buying-selling environment remains very robust.”
Below are some notables from the report. To view the entire report click here.
- Small Business transactions down 9% compared to 3rd quarter 2014 totaling 1814 business’s changing hands.
- Financial stability of business’s listed grew 4% to $450,000 in average revenue.
- Retail industry saw the biggest decline at 17% fewer transactions
- Pacific region down 22% in business sales transactions
- The median revenue of small businesses has been on a steady incline since mid-2012, leading to higher sale prices upon exit.
- BizBuySell Buyer-Seller Confidence Index reported a Seller Confidence Score of 62, up after two consecutive years at 56.
Regional Business Listed Data*
|California Highlights||# listed||Cash Flow Multiple||Hypothetical 250kCash Flow x Multiple = Listing Price|
|Contra Costa-Alameda-Solano, CA||189||2.75||$687,500|
|San Diego-Carlsbad-San Marcos, CA||401||2.50||$625,000|
|San Francisco-Oakland-Fremont, CA||363||3.17||$792,500|
|San Jose-Sunnyvale-Santa Clara, CA||162||2.96||$740,000|