Market Conditions for Small Businesses Being Sold

The following are highlights from a recently published quarterly MarketPulse from the The International Business Broker Association for Main Street businesses (up to $2 million in market value) and Lower Middle Market transactions ($2-50 million in market value).

REASON FOR SELLING: Baby boomers are beginning to exit their businesses in larger numbers than in the previous five years. Retirement was the number one reason driving business sales in virtually every segment. For businesses valued at less than $500 thousand, the number one reason for selling was owner “burn out”.

SUPPLY/DEMAND: For businesses smaller than $500 thousand, supply slightly outweighs buyer demand; for businesses in the $500 thousand to $5 million range, supply and demand seem to be balanced; and for businesses in the $5 million to $50 million range, the current market tends to favor the seller.

BUYER TYPE: Existing companies continue to be the lead buyers for businesses with a market value greater than $500 thousand, followed closely by previous business owners. Individuals continue to lead activity in the less than $500 thousand category.

TIME TO SELL/CLOSE: In general, expect a cycle time of 6-12 months. Smaller businesses (<$500 thousand) trend toward the lower end of the range.

HOT INDUSTRIES: Personal services, business services and retail have seen the most activity at the low end of the market. Manufacturing businesses continue to drive the largest portion of activity in the $2 million to $5 million range, followed by consumer goods/retail and wholesale distribution. Manufacturing was also the primary activity driver in the $5 million plus segment, followed by healthcare.

MULTIPLES: The typical selling multiples for healthy businesses up to $2 million are 2.0-3.0 times Sellers Discretionary Earnings, for businesses in the $2 – $5 million range, 4.0 times EBITDA and for companies in the $5 million to $50 million range, 4-8 times EBITDA. For businesses that are inventory dependent, the value of the inventory is typically additive to the valuation driven by a multiple.

DEAL STRUCTURE: Deal structures continues to consist of buyer equity, senior debt and seller financing. The portion of seller financing tends to decrease as deals get larger but remains an important element, as even strategic buyers want to insure that sellers are committed to the future success of the business.