By Scott Bushkie

As expected, the M&A market picked up in 2013.  As we talk with advisors across the country, we hear that inventories are significantly larger than a year ago.

But when it comes to leverage, the market is polarizing.  In a national Market Pulse survey*, 72 percent of Main Street brokers representing deals of $500K or less said they were operating in a buyer’s market in Q3 2013.

Meanwhile 79 percent of brokers representing deals of $5MM-$50MM categorized the current climate as a seller’s market.  This is the strongest seller’s market sentiment we’ve seen in the lower middle market since the survey started.

We know that more Boomers are entering the marketplace because retirement was the number one factor driving sellers to market this past year.  On the Main Street side (deals valued from $0 to $2 million), we’ll continue to see more of a buyer’s market as these Boomers flood the market.

But I believe sellers in the lower middle market (deals valued from $2 million to $50 million) will continue to maintain leverage.  The lower middle market will see its share of retiring Boomers too, but there’s still a considerable shortage of quality sellers compared to the number of well-financed buyers in this sector.

Private equity firms continue to be in an aggressive buy-mode and existing companies are looking to grow through acquisition as well.  The prevailing philosophy right now is buy rather than build for businesses looking to grow their top and bottom lines.

If you’re a business owner poised to sell and transition out of your business completely, you’re likely positioned for an existing company to buy you out.  If you’re looking to diversify your assets while still remaining active in the business, you’ll be better positioned for a private equity play.

Either way, we can expect private equity and strategic buyers will continue to compete and beat each other up on price, keeping valuations high in the lower middle market.

Survey results show that most advisors believe valuations will continue to be strong.  For instance, less than two percent of advisors believe values are going to decline in the near future. The majority believe values will stay the same, with 20 percent to 25 percent expecting values to grow from the current peak.

As for active industries, survey results show that manufacturing trended up again in 2013.  I think we’ll continue to see M&A grow in that industry, which is good for an area like Wisconsin.

Overall, as long as there are no major negative events, I predict M&A activity will be even stronger in 2014.  Keep a lookout for “under new management” press releases—it’s going to be a year for transitions.

*The Market Pulse Survey is co-sponsored by the IBBA and M&A Source in partnership with Pepperdine University.

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.