Quarterly Survey Shows that Business Transactions are Up Thanks to Low Interest Rates and Increased Marketplace Confidence
The Main Street Market Remains a Buyer’s Market, but the Trend is Shifting, and the Lower Middle Market Will Soon Offer More Opportunities for Buyers
PHOENIX, June 21, 2015 — Business transactions were up across the board in the first quarter of 2015, according to the Market Pulse Survey from the International Business Brokers Association (IBBA), the M&A Source and the Pepperdine Private Capital Market Project. According to the report, increased consumer confidence and lower interest rates are to thank for the flurry of activity, which has market trends shifting.
Quarterly Survey Shows that Business Transactions are Up Thanks to Low Interest Rates and Increased Marketplace Confidence
The report, which is published quarterly, studies conditions for businesses that are sold in the Main Street markets (having a value under $2 million) and the lower middle markets (having a value between $2 million and $50 million).
A representative with the Pepperdine Private Capital Market Project said that the report found increased confidence in both the buyers and sellers markets but that caution should be exercised since the trends may only be short-term as the economy is still volatile in its recovery. Variables like rising interest rates, less attractive financing options and the stabilization of valuations could cause a reverse in this trend over the next year.
The report found that 59 percent of brokers polled considered businesses valued under $500,000 in the Main Street market as a “buyer’s market.” On the other hand, businesses valued over $1 million were considered a “seller’s market.”
While the majority still consider Main Street businesses to be favorable for buyers, those numbers are still down considerably from a year ago, when 77 percent of brokers considered the sector to be a buyer’s market. The current percentage is a record low for the survey. If the trend continues, those businesses will soon be part of a seller’s market. Therefore, those looking at opportunities in this sector are advised to act now.
“Buyers looking at buying a company in the Main Street market can still maintain an advantage when buying a smaller firm, but the market continues to shift toward a seller’s market,” says Arizona Business Broker – Phil Reese, CBI, of West USA Realty. “Buyers are losing their leverage as time passes and business size increases. If you’re doing a $1 million to $2 million deal, you’re moving into a neutral market.”
Main Street deals continued to be valuated about the same or with slight increases. For transactions under $499,999, 65 percent had multiple SDEs of 1.75 to 3.0, and 76 percent of deals between $500,000 and $999,000 had multiple SDEs of 2.0 to 3.0.
The most popular business sold in the Main Street market provided business services. Other popular businesses included those offering consumer good and personal services.
Meanwhile, the lower middle market remains a seller’s market with no signs of a reversing trend. In the first quarter of last year, 64 percent of advisors said that those making deals valued between $5 million and $50 million benefitted from a seller’s market. For the first quarter of this year, 86 percent answered the same way — which was a record high for the survey.
Multiple deals grew 0.2 points for businesses valued between $2 million and $5 million and 0.4 points for those companies valued between $5 million and $50 million.
Advisors expect this trend to continue for another two years, in keeping with the current credit cycle. That leaves enough time for business owners to act if they are considering selling or consolidating, but it also means that they should act soon, and consult with a Business Broker in Phoenix.
Leading industries for the lower middle market included wholesale and distribution, construction, and information technology. Business services and manufacturing trailed closely behind.
The survey also found that:
All market sectors had an increase in new clients, and overall consumer confidence continues to rise. One a 5.0-point scale, deals valued at $500,000 or more had a mean of 3.2, deals between $2 million and $5 million had a mean of 3.2, and deals valued between $5 million and $50 million had a mean of 3.5 (an increase of 0.9 points). New client optimism is at a record high for the survey.
Retirement was reported as the top reason for business owners to sell in the lower middle market. It was given as the reason by 44 percent of owners of businesses valued between $2 million and $5 million and by 50 percent of owners of businesses valued between $5 million and $50 million. The majority of owners in all Main Street business sectors also gave retirement as the top reason to sell. More owners are listing retirement as their reason to sell than at any time since the survey started in 2012.
The average closing time rose for all sectors of the Main Street market. Closing times for businesses valued between $500,000 and $1 million rose two months. The average closing time for businesses in the lower middle market remained stable at around 7 months for businesses valued between $2 million and $5 million and 11.5 months for businesses valued between $5 million and $50 million.
The Market Pulse Survey was compiled from responses from 231 business brokers and advisors spread out over 39 states. Of those replying, 57 percent had at least 10 years of experience in the mergers and acquisitions industry. Those who participated reported that they closed on 143 transactions in the Main Street market in the first quarter and 20 transactions in the lower middle market. You can view the full report at: https://bschool.pepperdine.edu/about/people/faculty/appliedresearch/research/pcmsurvey/
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 Pepperdine University Graziadio School of Business and Management
A leader in cultivating entrepreneurship and digital innovation, The Graziadio School of Business and Management at Pepperdine University 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 5+ Southern California campuses, Northern California campus, 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, Presidential and Key Executives MBA and executive education certificate programs. Follow the Graziadio School at https://www.facebook.com/pepperdine.graziadio and https://twitter.com/graziadioschool.