The best time for selling a business, at least for the foreseeable future, may be right now. For businesses valued over $3 million, a strong seller’s market has been created by private equity groups (PEGs) flooded with cash – but it won’t last forever. For those businesses under $3 million, who are generally too small for PEG investments, a different kind of flood is looming on the horizon – mass Baby Boomer retirement. The third quarter Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source, and Pepperdine Private Capital Market Project gives us further insight into the current business markets.
Small Business – Valuation Under $3 Million
In a previous post, we discussed the recently released BlumShapiro-Uconn report assessing the impact of Connecticut’s aging generation of Baby Boomers on business. The most recent Market Pulse Survey underscores these conclusions and gives a national view of the buyer’s versus seller’s markets. Businesses valued under $1 million dollars are favorable to buyers, although there was some shifting towards a seller’s market as the economy strengthens and there are more willing buyers. Given the outlook for the retirement of Connecticut business owners, this trend likely won’t continue and the market for businesses valued under $3 Million will continue to be a buyer’s market. The buyer’s market will continue to strengthen over time as the buyer to seller ratio continues to decrease. Owners who are looking to sell now should go to market before the flood of Baby Boomers hits.
Mid-market Business – Valuation $3 – $50 Million
Businesses with valuations over three million, according to the third quarter Market Pulse Survey, are in a very strong seller’s market. With record-breaking estimates of $1.1-1.4 trillion of “dry powder”, a term used to describe the reserves of unspent cash, the money isn’t only available but needs to be spent by PEGs who are under pressure to buy in order to generate expected returns. Attractive companies, those with strong value drivers as discussed in our last post, are bringing in high valuations from PEGs with a need to invest cash and a willingness to pay for quality. Companies valued at $3-5 million, for many PEGs, are considered as add-on acquisitions. Add-on acquisitions are companies purchased to complement existing companies within the PEG portfolio, called investment platforms, in order to pool resources and gain market strength. For companies in this range, a business broker can help you seek out PEGs with relevant platforms.
As demonstrated Figure 2 below, a snapshot from the Executive Summary of the Market Pulse Survey, the larger the deals, the stronger the seller’s market. Companies whose earnings are $750,000 to $1 million or more are in a really good position to reach valuation levels that attract the interest of PEGs with cash to burn. Especially those with earnings over $1 million. However, with such high unspent cash levels, a market correction will take place at some point and could significantly change the market landscape.
For owners thinking about or planning to sell over the next few years, now may be the time to move to market. Request a Free Business Valuation today to better understand your position within your industry. The full Market Pulse Survey information can be found here.