Pepperdine University Report Finds Positive Outlook for Lower Middle Market Businesses

Study Points to a “Seller’s Market” Ripe for Acquisition and Identifies the Most Active Industry Sectors.The International Business Broker Association (IBBA) and M&A Source in conjunction with Pepperdine University prepare quarterly reports regarding the market conditions for businesses being sold in the “Main Street” market (values of $0-2 million) and lower middle market (values of $2-50 million). Overall, this second quarter of 2013 study details numerous elements and events that contribute towards favorable market conditions for business owners looking to sell their Business.

Boomer Retirement

Sixty-one percent of survey respondents said that baby boomers are beginning to exit their businesses in larger numbers than the previous five years. Retirement was the number one reason driving business sales across almost every sector except for the smallest businesses. Advisors predict deal volume will grow, versus stay the same, by a nearly 2 to 1 margin.

“As 10,000 baby boomers turn 65 every day, it comes down to a simple numbers game,” says Dr. Craig Everett, director of the Pepperdine Private Capital Markets Project. “The boomer exits are finally letting this demand be satisfied, which could boost deal flow dramatically.”

Other Primary Factors Contributing to an Exit

The report also found that for small businesses, burnout was the primary reason for sale, followed closely by retirement. “Prolonged stress and uncertainty in the economy has resulted in an increased number of Main Street business owners selling their company,” said says Dora Lanza, principal of Plethora Businesses.

Strategic Acquisition Focus

Existing companies dominated acquisitions this quarter, showing up as the number one buyer type in every category except the smallest Main Street businesses, according to the Q2 2013 Market Pulse Quarterly Survey Report. Compared to Q2 2012, existing companies appear to be edging out private equity firms for deals valued between $5 million and $50 million. In the $2 million to $5 million segment, individual buyers (including past business owners) lost half their market share. They accounted for 50 percent of the deals in that section in Q2 2012, but only 26 percent in Q2 2013.

“Buyer trends tie back to the idea that there is a limited quantity of quality businesses available,” says IBBA director Scott Bushkie, president of Cornerstone Business Services. “Some existing companies were forced to buy smaller businesses in order to meet their growth mandates. They’re outbidding the individual buyers due to the synergies they can achieve that individual buyers typically cannot.”

Hot Industries

In the lower middle market, for businesses valued between $2 million and $5 million, manufacturing led at 27 percent of completed deals over the last three months, followed by consumer goods/retail and wholesale/distribution, both at 13 percent. Manufacturing also led the $5 million to $50 million sector at 38 percent, followed by healthcare at 15 percent. This is a significant increase in manufacturing activity versus the same time period last year when it accounted for 7 percent and 23 percent of activity by sector, respectively.

Other Key Findings

  • Advisors agree, by a 3 to 1 ratio, that this is the best time for sellers to maximize the value of their business since the market peak in 2007-2008. In the lower middle market, less than two percent of respondents anticipate that values will decrease in the next quarter. Most respondents (75% or more) predict multiples will stay the same, with another 10%-24% predicting increases.
  • Advisors characterize the market as neutral for deals valued at $500,000 to $5 million and 68 percent of respondents say it’s a seller’s market for businesses in the $5 million to $50 million segment.
  • The Q2 2013 study continues to confirm earlier findings that larger businesses take longer to close. In the smallest Main Street sectors (businesses valued at $1 million or less), the majority of companies (54% or better) sold in six months. For businesses in the lower middle market, the majority (54%-56%) closed between six months and a year.