Pepperdine report reveals optimism for sales of Main Street and LMM firms

BVWireIssue #162-2
March 9, 2016

Advisors who aid business owners and buyers in selling and buying businesses expect a 60% increase in deals in 2016, according to the “Market Pulse Quarterly Survey Report” for the fourth quarter of 2015 (4Q15). This report is part of the Pepperdine Capital Markets project, which conducts ongoing research concerning the cost of private capital across market types and the investment expectations of privately held business owners. The International Business Brokers Association (IBBA) and M&A Source examine the market conditions for businesses being sold in Main Street (values $0 to $2 million) and the lower-middle-market (values $2 million to $50 million) sectors.

Strong multiples: Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less. “Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” says Scott Bushkie, CBI, M&AMI, president of Cornerstone Business Services and IBBA chair. “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015), whereas in the Lower Middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”

Additional key findings:

  • Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the lower middle market.
  • Main Street businesses sold for approximately 91% of their asking price in Q4 2015. By comparison, lower-middle-market businesses—which typically aren’t marketed with an asking price—received 99.5% of the internal benchmark set by the advisor and seller.
  • In the smallest deal category (businesses valued at less than $500,000), first-time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5 million and $50 million), private equity made up the largest buyer group. PE groups were not active at all in the less-than-$500,000 segment, while individual buyers accounted for only 14% (7% first-time buyers, 7% repeat owners) of the larger sector.
  • Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the lower middle market as well. Manufacturing companies led the lower middle market.

The survey for 4Q15 was completed by 348 business brokers and M&A advisors representing 38 states who completed 410 transactions.

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