Middle Market Trends

As the “spring market” starts arriving in the North-East US, supported by an improving transaction market, we wanted to give our readers insight into a few current trends and research reports for “Main Street USA”.

A recent study conducted by the IBBA (international Business Broker Association) and M&A Source identified two key reasons for selling by owners of businesses valued between $500k to $50MM:  (a) retirement of baby boomers, and (b) burnout or family reasons.

The first reason is somewhat intuitive given that the first boomers are now 67 years old, entering “prime age” for selling their business. The gradual shift in demographics will accelerate such trend – with the implicit notion that successful business sellers in this group need to be better prepared with a more sophisticated market campaign to sell their business in an ever more competitive market.

However, the second reason – burnout – is a reflection of the significant recession that started in 2009: many boomers would have sold earlier, however, they were side tracked and held on to to their businesses much longer than planned – in the hopes that “next year would be better”.

“This observation is completely consistent with our experience in all our seven offices across the region”, says Achim Neumann, President, A Neumann & Associates, New Jersey.  “At no time in the history of our firm have we dealt with so many soon to be retirees who have apparently held on to their business for much too long”

As a matter of fact, for businesses in the $2MM to $5MM range, it takes between eight months to two years to close a deal – although in many instances, A Neumann & Associates has been closing considerably faster in the past two years.

“Nevertheless, companies in the lower middle market really need to be proactive in their planning,” said Kevin Dempsey, principal of Summa Financial Group and chairman of the M&A Source. “Burnout and family issues are leading reasons these owners sell, but when it takes a year or more to sell a company, you don’t want to be reacting to negative triggers—especially as buyers put the most value on your last 12 months of business performance.”

Thus, good mid-term planning and forecasting will be a key driver to enable a business owner to make a smooth transition.

Another interesting trend in said research relates to the typical ‘buyer profile’ – something our firm is consistently questioned about by prospective sellers. It is mostly companies or individuals (as opposed to private equity groups or competitors) that are looking to acquire, whereas for companies under $1M value, individuals are mostly seeking to “buy themselves a job”. Interestingly, often idle cash is used for acquisitions as opposed to lender funds in highly leveraged transactions.

Finally, with many deals never making it to the closing table, one might question the reasoning for such: the #1 reason for deal termination is unrealistic expectations on either buy or sell side, followed by a lack of buyer preparation, followed by poor seller preparation. Combined, the three factors account for 65% of all deal terminations.

Bottomline?

Business owners need to plan well ahead in an always increasing competitive “business-for-sale” market, requiring more thorough preparation starting from proper documentation, to financial analysis, to third party valuations, to sophisticated prospectus preparation in order to succeed. Failing to do so will leave a business owner in a space that was recently described by the SBA as “80% of all privately held businesses will never be sold due to lack of proper preparation”.

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