As small businesses embrace a strengthening economy, there is another reason for entrepreneurs to be optimistic: Some advisors say it’s the best M&A market they have ever seen, certainly in recent years, and even small business owners who aren’t yet ready to retire are looking to take advantage.
The decision to sell a business cannot be made lightly, and though it’s a seller’s market, analysts insist that business owners must do their due diligence before they even consider a deal.
In their Q2 2018 Market Pulse Report, the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market surveyed business advisors about the current M&A market. For small business sales, advisors say seller sentiment hasn’t been this high in the five-year history of the quarterly report.
Entrepreneurs should be proactive, said Scott Bushkie, a member of the Market Pulse Committee, fellow of the IBBA and founder of M&A firm Cornerstone Business Services.
“Those who have done their homework know that it is a seller’s market, and may not get another chance like this for another five to seven years, and are not going to miss another window of opportunity,” Bushkie told PYMNTS about the current M&A sentiment among business owners.
“I have talked to several M&A advisors, and we are seeing many active buyers working on multiple deals at once,” he continued, “which has not been the case in past years – or, at least, not at the volumes we are seeing today in the lower-middle market.”
Separate research from BizBuySell, as reported in Forbes, reaffirmed those findings: According to a report published last week, nearly one-third of small business owners plan to sell their businesses within the next two years, regardless of how long they have owned them. The majority of business buyers – 84 percent – plan to buy in the next year.
But small business owners shouldn’t rush to sell their businesses simply because the market is strong. According to Bushkie, buyers will be looking closely at a company’s operations and financials, particularly in the latest 12 months of the company’s books. That means firms must ensure their books are in order and have their finances reviewed by a CPA – the “area of deepest due diligence in a sale,” he said.
“It is always better to identify ‘warts’ in a business early, versus later,” added Bushkie. “No one likes surprises, and later in the deal usually will cost the seller significantly.”
He recommended that businesses understand how they stack up against competitors in their industry, too.
“The buyer will slice-and-dice your numbers every way possible to understand the business, [and] any risks and opportunities going forward,” he said.
Sales revenue isn’t the only metric that buyers care about, either. A business’ existing relationship with corporate buyers and vendors, as well as B2B payments behavior, makes a difference to buyers. It all comes down to risk, Bushkie explained: A business that consistently pays its suppliers late means its working capital is running thin, leaving less money for the seller when a deal closes (if working capital is included in the sale, which isn’t always the case, he noted).
A business that has its B2B relationships concentrated to a single vendor can also jeopardize a firm’s attractiveness to a buyer.
“If you are only sourcing a key part of your business, being raw materials or IP, from one company, and have no Plan B, that will typically lower the value of the business or change the structure of the deal, as it increases the risk to the buyer,” said Bushkie.
In a separate report from Wells Fargo and Gallup published last week, nearly one-fifth of small business owners cited hiring new staff and retaining current staff as their biggest challenge in an environment of record-low unemployment. Researchers for the Q2 2018 Market Pulse Report also emphasized the impact of today’s tight labor market on M&A, though noted that analysts are “split” as to exactly what that impact looks like.
More than one-quarter of advisors said that talent shortages have a negative impact on a small business’ ability to close a sale, yet 16 percent said it actually helps. Some experts note that the struggle to hire new talent is squeezing businesses’ organic growth efforts, making companies less attractive to buyers.
“For Main Street companies, [the tight labor market] has imposed some real challenges, as few people want to invest their life savings into a business where it is a revolving door, or they don’t know if they will be able to keep or get the help they need to run the business – not to mention, try to grow the business,” Bushkie explained.
But there is a way that the tight labor market can actually support an entrepreneur’s sales ambitions, particularly in the lower-middle market, where cash stockpiles are strong.
“I believe many have the philosophy that it is easier to [achieve] growth through acquisition than it is [to grow] organically, due to the challenges of finding good people to help with the growth,” he said. “Most companies I have talked to are in a buy versus build mentality.”
In today’s market, even business owners who may not yet be ready to retire are considering a sale, seeing an opportunity to diversify risk and take advantage of buyers’ eagerness. Bushkie said that business owners must be proactive, however, and should examine aspects of their business – like B2B payments, supplier relationships and staffing – that they may not have considered to be important in how their firms look to prospective buyers.
“Now is a good time to sell. It will not get any better before it gets worse,” he said. “But there are still things a seller can do to stand out in the crowd.”
Join izo, CFO Dan Steinberg and PYMNTS CEO Karen Webster on Tuesday, August 21, 2018 at 1:00 p.m. (EDT)