Selling a business in 2018 is still bullish
Market conditions for selling a business in 2018
Selling a business in 2018 is still bullish on a strong M&A market for 2018. Optimism persists despite economic and political uncertainty about U.S. tariffs. This is according to the Q1 2018 Market Pulse Report. This report is published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project.
On May 1, 2018 President Trump delayed steel and aluminum tariffs for key allies. This includes the European Union, Canada and Mexico. Despite the uncertainty over a future trade war, many advisors surveyed said that tariffs will not impact the sale of businesses for both buyers (56 percent) and sellers (60 percent). In fact, 86 percent of advisors said business owner confidence is better than a year ago.
“The industry as a whole is keeping a close eye on the tariff situation. Right now we do not see the trade wars impacting buyer confidence,” said Andrew Rogerson, CM&AP, M&AMI, CBI, CABB, President, Rogerson Business Services, member of the IBBA/M&A Source. “We expect better clarity on how they will impact M&A as buyers and sellers reconcile tariffs with business costs. Many businesses are taking a ‘wait and see’ approach as current economic growth could make an increase in raw material pricing more tolerable.”
Rising Interest rates selling a business
On the other hand, rising interest rates are viewed as problematic. Advisors are predicting a negative impact on sellers (43 percent) and buyers (68 percent). Rising interest rates may spur activity in the short term as buyers are motivated to take on debt before financing becomes more expensive. As interest rates move up, purchase prices may be subdued, despite an otherwise strong market.
“With interest rate increases looming, buyers and sellers were motivated to accelerate the deal making process early this year. We may continue to see abbreviated timeframes in order to get ahead of additional increases,” said Craig Everett, PhD, Director of the Pepperdine Private Capital Markets Project. “At the same time, a strong seller’s sentiment in the lower middle market gives business owners and advisors the leverage they need to set timetables and keep the deal process moving forward.”
Consistent with general market optimism, seller market sentiment is at an all-time high in four of five market sectors. Business in the $1 million to $2 million sector had the biggest jump in confidence, growing 14 percentage points. Despite the seller market advantage, the majority of Main Street business owners fail to plan for the sale of their business. Advisors indicated that half of businesses that went to market in the last quarter did not sell and that 88 percent of business owners in the less than $500,000 sector did not have a formal exit strategy.
Is it a Sellers’ market or a Buyers’ market?
Consistent with general market optimism, advisors believe seller advantage is growing, with year-over-year seller market sentiment increases in four market sectors. In the Main Street market, the $1 million to $2 million sector earns the biggest jump in confidence, growing 14%. Seller market sentiment is at an all-time high in four of five market sectors.
Business values selling a business
In the first quarter of 2018, final sale prices came in anywhere from 89% to 100% of the pre-set asking price or internal benchmark. Lower middle market companies in the $2 million to $50 million range achieved the highest values at 100% of benchmark.
As the below graphic shows, as you move up in business value, there are fewer businesses available for sale. However, a proportionately larger number of buyers are pursuing these types of companies to acquire. That is, supply and demand is driving up valuations.
How long does it take to close the sale of a business?
The average time to close the sale of a business is 8.7 months…if it closes.
With interest rate increases now becoming more talked about, buyers and sellers were motivated to accelerate the deal making process early this year. This may continue to provide quicker closing timeframes to get ahead of higher interest rates, however, a strong seller’s sentiment in the lower middle market gives business owners and advisors the leverage they need to set timetables and keep the deal process moving forward.
As the graphic shows below, the larger the transaction the longer it takes to close the deal and this period continues to increase as buyers become more sophisticated.
Why are business owners selling their business?
The number one reason to sell a business across all sectors is retirement. The number two reason is burnout.
Main Street Business Owners make no plan to sell their business
The majority of Main Street business owners fail to plan for the sale of their business. Advisors indicated that 88% of business owners in the <$500,000 sector conducted no formal planning prior to engagement. Lower middle market business owners were more proactive, although roughly 45% also failed to make advance plans to sell.
Even among business owners who do plan (Figure 11), only a few are working with any kind of professional advisor (e.g. CPA, wealth, attorney, broker) to discuss exit strategies a year or more in advance.
Half of businesses do not sell
Advisors were asked to share what percentage of transactions terminated without closing in the last three months.
They reported that nearly half (49%) of their transactions terminated without closing this quarter.
Leading reasons those deals failed to close:
- Seller’s unrealistic expectations (12%)
- Buyer got cold feet (12%)
- Buyer and seller couldn’t agree on terms (10%)
- Seller got cold feet (9%)
- Offers came in below seller’s expectations (8%)
- Poor books and recordkeeping (6%)
- No offers submitted (6%)
- Books didn’t match reported numbers (5%)
- Financing fell apart (5%)
- SBA fell apart/took too long (4%)
- Buyer’s lowball offer (3%)
Market Pulse is a national report
A reminder that this report is a national report and so does not include what’s happening in each individual state of the USA.
As I am focused purely on the sale of businesses in California it would be my suggestion that the results are a patchwork with Southern California and the Bay Area of San Francisco doing reasonably well but the Central Valley and more remote areas of California still feel the effects of the Great Financial Crisis.
Market Pulse report participants
The quarterly IBBA and M&A Source Market Pulse Survey was created to gain an accurate understanding of the market conditions for businesses being sold in Main Street (values $0-$2MM) and the lower middle market (values $2MM -$50MM). The national survey was conducted with the intent of providing a valuable resource to
business owners and their advisors. The IBBA and M&A Source present the Market Pulse Survey with the support of the Pepperdine Private Capital Markets Project and the Pepperdine Graziadio Business School.
The Q1 2018 survey was completed by 271 business brokers and M&A advisors. Respondents completed 257 transactions this quarter.
Are you thinking about selling your business and move to your next challenge? Would you like to know the value of your business? If you would like more information, please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.
