By Dave Driscoll
The Third Quarter 2017 Market Pulse report by the International Business Brokers Association (IBBA) and M&A Source reveals several factors that have been consistently driving the market for mergers and acquisitions across the United States.
The drivers for both buyers and sellers may offer useful insight for those of you hoping to acquire or sell a business in 2018.
Factors Driving Buyers:
High quality businesses. Buyers have anticipated that the wave of baby boomer retirements would create a health supply of businesses for sale, but the market is actually facing a shortage of high quality acquisitions. The buyers have capital to buy but are finding that there is not enough inventory of quality businesses. The relatively small number of quality acquisitions is limiting the comparable sales statistics used to determine valuations multiples. Businesses that are performing efficiently and profitably will garner well-deserved attention; those that are struggling will have more difficulty gaining attention from buyers.
Scarcity of talent. If you are in business, you understand how hard it is to find talented employees. Companies that are seeking to grow, or even just maintain, on-time delivery and quality may acquire a competitor in order to gain/grow an established workforce. An acquisition can add much-needed talent to the buyer’s workforce, while the additional gross profit gained also helps pay for the purchase.
Additional revenue. Let’s face it, in many industries you must lure clients/business away from a competitor to grow your own business. This battle royale leads to declining profit margins and strained workforces for everyone in that field. A logical way to increase revenue and market share is for a consolidator to strategically acquire one or more competitor, merge the acquired businesses together, and remove the weak employees and unnecessary/outdated equipment. The synergies created, combined with the savings from trimming the unneeded overhead, provide a significant boost to revenue.
Factors Driving Sellers:
Seller market sentiment is positive. Emotion drives the market and sellers are currently interested in discussing the sale of their businesses. This willingness to entertain the idea of selling their businesses reflects the possibility owners may have finally recovered from the damage inflicted by the 2008-2009 market correction. Furthermore, many owners have postponed retirement due to loss of business value caused by the recession. Eight to ten years is a long time to wait to begin enjoying retirement.
Multiples of cash flow. Although year-over-year multiples have declined from recent highs in most market segments, they still remain strong. Sellers are compelled to enter the market if they believe they will receive a fair value for their business. Therefore, strong multiples offer sellers an opportunity to cash out at a value to satisfy their future objectives.
Time to close a transaction. From initial interest to closing the deal, the average time to complete a transaction is getting shorter, increasing sellers’ willingness to list a business for sale. My best advice: sellers who are prepared and have an experienced team (including your broker/intermediary, accountant and attorney) to help move the deal through the process efficiently will reach the closing table fastest.
Finally, the top two motives for sellers to sell remain the same: retirement and burnout.
If you would like to learn more about the Third Quarter 2017 Market Pulse report from the International Business Brokers Association (IBBA), M&A Source, and Pepperdine Private Capital Markets Project, visit our website www.MetroBusinessAdvisors.com/ to download the complete report.
Read Dave’s column at: http://www.sbmon.com/Articles/Article/1255/What-Drove-Business-Buyers-and-Sellers-in-2017
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or (314) 303-5600. www.MetroBusinessAdvisors.com