by Scott Bushkie. CBI, M&AMI
As I drove down to Dubuque, Iowa for a meeting last week, I couldn’t help but notice all the farmers harvesting their crops. It made me think about the sellers I’m working with right now and the current status of the M&A market.
Every fall brings harvest time for Midwest farms. Some years are better than others, and farmers never know how rain, heat, bugs, crop prices, or even the world economy will affect their return. But one thing is certain—they know when it’s time to harvest.
Not so for small business owners. Unlike the farmer who must literally “make hay while the sun shines,” the small business owner can monitor market conditions and sell when the timing is right.
Just like the farmer can’t control the weather, there are a lot of economic factors that business owners can’t control. We can’t control the M&A market, financing trends, industry trends, number of buyers/sellers in the marketplace, political uncertainties…all of which can affect the overall value of our businesses.
But we can watch the trends and harvest when market conditions are in our favor. And according to at least one national industry report, that time is now.
According to the Q2 Market Pulse Report, which surveyed almost 300 advisors in 40 states, more than three-quarters (76%) of M&A advisors agree that the market doesn’t have enough quality businesses for sale compared to the number of buyers, especially for businesses in the lower middle market’s $2 million to $5 million value range.
The Market Pulse Report (sponsored by Pepperdine University’s Graziadio School of Business and Management, International Business Brokers Association and M&A Source) also found that advisors agree, by a three to one ratio, that this is the best time for sellers to maximize the value of their businesses since the market peak in 2007 and 2008.
M&A is Cyclical
One of the tricks in trying to time your business sale with the M&A market peak is looking at the number of businesses in the marketplace.
Right now, there are fewer businesses than buyers in the market. But, again according to the Market Pulse Report, 60 percent of advisors agree that boomers are exiting their businesses at a larger number than they have in the last five years. Eventually the supply-demand economics will switch and there will be more sellers than buyers; it’s a simple numbers game.
But for the companies that are out ahead of the curve, they’re reaping the rewards of a favorable harvest. In fact, in 2013, we’ve averaged three buyers for each lower middle market business we’ve taken to market, and we’ve heard similar reports from other M&A advisors across the country.
Interest rates are another key factor that can impact the value of your business. There’s only so much cash flow, and if the buyers have to pay more in interest, they’re going to pay less in principal—in other words, less to you as a seller.
Bubbles and Crystal Balls
The M&A world fluctuates through seller and buyer cycles much like our weather patterns fluctuate. Is it time for you to reap the rewards of your business? Only you can answer that question. But what I know for certain is that there will be a bubble, it will burst, and eventually the market will come back again.
The M&A market ebbs and flows approximately every three to five years. In 2008, we talked to clients that just wanted to hold on for “one more year.” Unfortunately, most of them had to endure four more years before multiples came back to pre-recession levels.
If you think your business is peaking or you think it might be time to slow down, I seriously recommend talking to an M&A advisor. You might be surprised at current valuations.
I wish I had the crystal ball to know how long this good seller market will last, but all we can do is make educated predictions.
The market is good now and we’re helping people take advantage of that. The sun is shining for business owners seeking to sell. Is it time to harvest your hay? Perhaps you should be asking, Is it time to Sell My Small Business?