Over the last year, a shift has been occurring in the business for sale marketplace. As business financials rebounded and buyers returned to the market in larger numbers, seller confidence has been swelling. New research, however, reveals that distinguishing between a buyer's and seller's market is filled with nuances.
The International Business Brokers Association (IBBA) in partnership with Pepperdine University's Private Capital Markets Project recently released its Q4 2014 Market Pulse report, detailing business transaction trends for Main Street and Lower Middle Market companies. Business brokers and M&A advisors that contributed to the IBBA research made it clear that market advantage hinges on business size.
Within the IBBA's "Main Street" analysis, 69% of survey respondents feel that it's a buyer's market for businesses valued under $500,000. This drops to 50% for businesses between $500,000 and $1 million, and 43% for those between $1 and $2 million.
Moving up the food chain to lower middle market businesses, the picture changes. 65% of brokers and advisors feel it's a seller's market for businesses with values between $2 and $5 million; 77% deem it a seller's market for firms in the $5 to $50 million range.
"These results are consistent with what we are seeing in the marketplace", said Scott Bushkie, CBI, M&AMI, Principal at Cornerstone Business Services, Inc. "Over the last couple of years we have seen improving conditions for sellers move from the middle market to the lower middle market and more recently into the main street market."
Why larger businesses tip the scale toward sellers
There are a number of factors that give larger businesses the seller advantage, from financials to purchasing motivations.
In most instances, the bigger the company, the higher its revenues, cash flow and ultimate valuation are likely to be. Larger businesses usually have a more predictable (and therefore less risky) cash flow, which helps them secure higher multiples and sale prices. Basic supply and demand comes into play too: a lower inventory of large businesses for sale puts sellers in the driver's seat during negotiations.
Large businesses also tend to attract more sophisticated buyers. The Market Pulse report found that nearly half of all Main Street buyers' motivation for purchasing a business was to "buy a job." For lower middle market buyers, purchases were viewed as horizontal or vertical add-ons to their existing operations. Buyers going after larger entities have probably endured the transaction process before, and thus bring more realistic expectations to the table and a higher readiness to strike a deal.
The Market Pulse data also indicates that as a company's value increases, the geographic scope of its potential buyers widens. 68 percent of businesses valued between $5 and $50 million, and 44% of those in the $1 to $2 million bracket, are bought by national buyers--compared to just 20% of businesses under $500,000. The smallest businesses often aren't marketed outside of their city or state, leaving most of these listings for local buyers.
How small businesses can replicate big business seller advantages
Despite what the data shows, small business owners looking to sell don't have to resign themselves to buyer's market conditions. Proactive owners can take multiple steps to ensure their small businesses create strong demand and put themselves in the drivers seat.
To sell like a big business, you need to be organized like one. Establishing processes, paper trails and even technology that brings a degree of order to tax, accounting and financial planning is key to attracting mature buyers. You should consider investing in your company's assets, tangible and intangible. Upgrading real estate and equipment, as well as protecting intellectual property, corporate partnerships and contracts, add value to the entire business--and could leave you with a higher sale price. Lastly, push for smarter marketing. Businesses with small, but fiercely devoted audiences are more appealing than those that settle for a revolving door of one-off interactions.
The business-for-sale marketplace is a dynamic entity; today's transaction conditions can fluctuate by tomorrow. Regardless of your business size (or the targets your eyeing to buy), staying aware of current deal trends and their key drivers facilitates stronger deals, and better results on both sides.