Pepperdine University, IBBA Study on Exits – It Is A “Buyer’s Market” for Business Deals Under $500,000

Pepperdine University, IBBA Study Reveals Individuals Are Largest Buyer Group for Businesses Under $5 Million; Significant Increase in International Buyers

78 percent of Respondents Say It Is A “Buyer’s Market” for Business Deals Under $500,000

For the first time individuals were the largest buyer group for businesses that were valued under $5 million, according to the first quarter 2013 Market Pulse Quarterly Survey Report, a study of businesses sold in the Main Street market and lower middle market. Released by Pepperdine University’s Graziadio School of Business and Management, International Business Brokers Association (IBBA) and M&A Source, these findings differ from the third quarter 2012 report that found existing companies were the top buyers for all deals of $1 million and greater.

“As our economy picks up steam, more high-net worth individuals are transitioning from employees to business owners,” said George Lanza, president of Plethora Businesses. “Many of these individuals are buying businesses for job security or because they anticipate a better ROI than with other investments.”

For deals valued at more than $5 million, the most common buyers were existing companies looking to grow through acquisition (40 percent), followed by private equity platforms (30 percent), and private equity add-ons (20 percent).

The recently collected data from the first quarter 2013 Market Pulse Quarterly Survey Report shows that the majority of Main Street brokers (brokers that sell businesses valued up to $2 million) think it is a buyer’s market right now. For deals valued at less than $500,000, 78 percent of respondents say supply and demand is in the buyer’s favor. Leverage starts to balance out as the deals get larger, with respondents evenly split (50/50) over which side has the most leverage in the $2 million to $5 million sector. For businesses in the $5 million to $50 million range, the tables turn dramatically, with 65 percent of respondents pointing to a seller’s market.

“The transition from a sellers market in the third quarter of 2012 to the current buyers market reflects more confidence in our economic recovery,” said report co-author Dr. John Paglia, director of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. “For deals under $500,000, the majority of buyers (73 percent) are coming to the table with cash – this is an important sign that our economy may be turning around.”

International buyers made a strong appearance in this quarter’s survey, representing 20 percent to 30 percent of buyers for businesses valued at $1 million and above. Previous reports (since Q2 2012) haven’t seen international buyers exceed 8 percent in any sector.

“U.S. tax policy is turning American companies into bargains for foreign buyers,” continued Paglia. “High U.S. tax rates coupled with interest rate cuts by the European Central Bank has resulted in an increase in international purchasing power.”

For the second quarter in a row, retirement ranked as the number one reason driving business sales across all Main Street and lower middle market sectors, followed by burn-out. Business brokers and M&A advisors around the country reported that client loads increased at a faster rate compared to any other quarter since the survey started in June 2012. In addition, more than 50 percent of respondents didn’t lose a client in the first quarter.

“Trends show a growing number of businesses on the market and we can expect listings and engagements will continue to increase as baby boomers look to retire and sell their businesses,” said Jim Afinowich, president of Fox & Fin Financial Group.

For deal structure in the Main Street market, buyer equity led every sector, followed by relatively equal amounts of seller financing and senior debt. For businesses valued up to $5 million sellers are holding around 20 percent to 25 percent in financing.

“These national trends confirm that seller financing continues to be a key component in completing a transaction,” says Scott Bushkie, principal of Cornerstone Business Services. “Business owners who aren’t prepared for that will have a much lower chance of successfully completing a sale.”

Other key findings:
– Only 10 percent of respondents think crowd sourcing will be a source of equity to close deals.
– Respondents reported a 2012 closing rate of 64 percent for Main Street and the lower middle market combined.
– In the smallest sector (values of under $500,000), investor support accounted for only 8 percent. Investor percentage was 25 percent for deals valued at $5 million and above. Buyers in the $2 million to $5 million sector got the most outside support with 13 percent general investor funds and 25 percent family/friend funds. A very small percentage of buyers (less 6 percent in any sector) funded an acquisition with help from a home equity line of credit.
– For businesses valued between $1 million and $2 million, construction/engineering led at 21 percent of completed deals over the last three months. In the lower middle market, for businesses valued between $2 million and $5 million, closings were evenly distributed between wholesale distribution, business services, construction/engineering, manufacturing, and consumer goods/retail, all at 20 percent. Businesses between $5 million and $50 million in value followed nearly the same trend, with basic materials/energy, construction/engineering, information technology, and manufacturing, all at 20 percent.

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About the Market Pulse Quarterly Survey Report
The International Business Broker Association (IBBA) and M&A Source present the Market Pulse Quarterly Survey Report with the support of the Pepperdine Private Capital Markets Project and the Graziadio School of Business and Management at Pepperdine University. 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 the Main Street market (values $0-2 million) and lower middle market (values $2 million to $50 million). The Market Pulse Quarterly Report helps business owners and their advisors make well-informed decisions regarding selling their business and gives business brokers and intermediaries timely and accurate data to help them build and maintain a successful and sustainable business.

About the Graziadio School of Business and Management
Founded on the core values of integrity, stewardship, courage, and compassion, Pepperdine University’s Graziadio School of Business and Management has been developing values-centered leaders who advance responsible business practice since 1969. Student-focused, experience-driven and globally oriented, the Graziadio School offers fully accredited MBA, Masters of Science, bachelor’s completion and non-degree executive business programs for business professionals, entrepreneurs, managers and senior executives at all stages of their professional and personal development.

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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.

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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.

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SOURCE: Pepperdine University