The quarterly IBBA and M&A Source Market Pulse Survey was created to gain an accurate understanding of the market conditions for businesses being sold in Main Street (values $0-$2MM) and the lower middle market (values $2MM -$50MM). The national survey was conducted with the intent of providing a valuable resource to business owners and their advisors. The IBBA and M&A Source present the Market Pulse Survey with the support of the Pepperdine Private Capital Markets Project and the Pepperdine Graziadio Business School.

The Q3 2018 survey was completed by 271 business brokers and M&A advisors. Respondents completed 237 transactions this quarter. High demand and low supply continue to make this a favorable seller’s market as reported in the Q3 2018 Market Pulse Survey Report.  Buyers are active and competing against each other for quality deals, meaning sellers have choices when selecting their preferred buyer. This kind of leverage contributes to strong valuations and advantageous deal structures with more cash at close.  

Several factors are driving the current market climate, including CEO confidence, healthy corporate balance sheets, record amounts of acquisition capital among both strategic buyers and private equity, and the continued relatively low cost of debt to finance deals. 

According to the NFIB, small business confidence is at a record high, with the longest stream of small business optimism in history.

In an exceedingly tight talent market, strategic buyers are looking to M&A to drive business growth. They’re willing to pay a premium for quality businesses. These buyers continue to compete with private equity firms, particularly in the lower middle market. With private equity fundraising continuing to surge, firms are shifting down market, targeting smaller acquisitions—but greater deal quantity—in order to put their capital to work.

Year-over-year, multiples were generally stable or increasing in most market segments. Looking back over the last five years, multiples remain near or above the historic average. In Q3 2018, in the lower middle market, sellers are walking away with more cash at close.

Seller financing helps bridge the gap between what the buyers can, or are willing to pay, and what the seller wants for their business. In a seller’s market like this, we expect to see sellers getting more cash at close and carrying less risk on the purchase,” said Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project.  

“When the market yields high valuations, seller financing can remove obstacles to third party lending,” Everett continued. “But sellers need to know that seller financing is almost always part of the deal, even when you have well-funded buyers competing to acquire your business,” Everett says. “Seller financing communicates a sense of confidence to the buyer and their lender that the seller is committed to the buyer’s continued success. Generally, buyers feel more comfortable when the seller keeps a little skin in the game.” 

Certified Business Brokers (CBB) is one of the oldest and largest business brokerage firms in the U.S. Headquartered in Houston, this full-service firm that has been serving clients since 1974 with a team of professionals that has over 230 years of collective experience closing business transactions in excess of $1 billion in revenues. CBB specializes in mergers and acquisitions, restaurant sales, business brokerage, and business valuations and appraisals.