The IBBA and M&A Source Market Pulse Survey was created in 2012 to provide business owners and their advisors with analysis of changing market conditions. Here at Apex we use these surveys to get a sense of what’s going on in the Main Street (businesses between $200k-$2M) and the lower middle ($2M-$50M) markets. Q2 of 2021 gave us a chance to look at the strange year of 2020 and what has changed in 2021. Given that the findings from the survey come out to over 100 pages, we’re going to save you from reading it and share just a few observations of our own.
Covid-19 Changed Conditions for Buyers and Sellers
While it may seem obvious that “Covid changed things” in the business transaction market, most outsiders would not necessarily be able to tell you precisely how.
Many talented individuals got laid off in March 2020. While some of them were hired back, many of them weren’t, and this led to an openness to a shift in career, including buying a business. The overall lack of certainty not just globally but internationally, and not just in how we live and work but even how we vacation and make future plans has led some to see business ownership as a way to control their own destinies. We’ve certainly seen quite a few of those individuals come through our doors in the last 18 months.
Sellers had to work through their own situations starting in March 2020. Layoffs may have been part of the solution, but they also had to deal with local legislation and had to embrace remote work, even if they had previously never considered the option. If they made it through 2020, even with the assistance of EIDL and PPP, they now had a story to tell: my business survived through a pandemic. That made some businesses more valuable than they were prior to the pandemic, and the owners of some of those businesses, now that they’ve had a moment to stop bailing water, are keen to cash out. The adjusted EBITDA on such businesses in the lower middle market have been enjoying a .5 multiple increase in valuation.
For those sellers who didn’t have a “pandemic-proof” business, they still had opportunities to sell to buyers who were open to turnaround options.
Areas of Focus
The survey also confirmed trends we’ve been seeing. For example, in due diligence in the lower middle market, the focus has been on staffing. With the major changes happening in employment trends due to the pandemic upheaval, buyers in the lower middle market have been focusing on key players and putting employment agreements in place for their transactions. Main Street businesses are also looking at staffing issues and getting clear who has been in place and for how long, and what the turnover rate has been historically and during Covid-19.
Some things never change. We still see a closing time of 3-4 months from LOI to dotted line, but 50% of those deals fall through for one reason or another. One of the consistent reasons a deal may ultimately fall through is a total lack of mental and actual exit planning on the part of owners. 95% of owners do not have exit plans in place and get dismayed when we tell them about tax consequences or what they will need to do accounting-wise to be sale-worthy.
If you’re serious about selling a business, whether this year, next year, or sometime in the future, the one single action you can take today to make sure you get more money at closing, a better multiple, and fast, smooth sale is exit planning. Then when you’re ready to sell we can just start executing on that plan.
Need help getting started on that exit planning? We know just where to start. Give us a call.