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  • Writer's pictureJohn Washington

Small Business Acquisition Trends - Q4 2023 Market Pulse Summary

Current Market Conditions and The Impact on Sellers

In a prior series we explored factors that are relevant to sellers contemplating a business sale in 2024. The key takeaways are that sellers should prepare well in advance of the sale process, form transaction goals before the sale process, and keep a pulse on trends that impact the odds of completing a business sale.

In this post, we’ll take a more granular look at recent transaction data that are relevant to small business owners considering a sale. While this information is not meant to be relied on as advice for sellers, it is useful for assessing how current market conditions may impact the sale process and where sellers should prepare for flexibility on the path to completing a transaction.

Sourcing Private Company Deal Data

Collecting private company acquisition data is a difficult task. Unlike public companies, reporting requirements for private companies are minimal and buyers and sellers generally prefer that transaction details remain confidential. This is especially true among small business sales under $50 million of enterprise value.

Surveys are an effective method to aggregate private deal information and the International Business Brokers Association (IBBA) publishes a thoughtful Market Pulse survey that includes hard-to-find information on private transactions. Specifically, the survey focuses on transactions with sale prices less than $50M and offers a glimpse into the market for small business sales.

About the Q4 2023 Market Pulse Survey

  • Quarterly survey conducted in the first fifteen days of January 2024

  • Responses gathered from 382 business brokers and merger & acquisition advisors

  • Covers 330 transactions that were completed in the fourth quarter of 2023

  • Transactions split into two segments:

    • Main Street: Less than $2 million purchase price

    • Lower Middle Market: $2 million to $50 million purchase price

Environment For M&A: Increasing Rates, Decreasing Deals

Survey respondents pointed to high interest rates as the most significant headwind to closing a transaction in 2023. The Federal Reserve’s aggressive rate hiking cycle has resulted in a higher cost of capital and a reduced appetite for risk, especially among lenders. From Q2 2022 to Q2 2023, the federal funds target rate increased 5%, the steepest rate hike since the 1980s, leading to challenges for the merger and acquisition market.

Chart of survey results related to deal headwinds in 2023
High interest rates were the most significant headwind to closing a transaction in 2023.

As for attributes that are expected to drive increased M&A activity in 2024, the leading response is lower interest rates, followed closely by a reduction in inflation.

Survey respondents indicated that lower interest rates and lower inflation will increase M&A activity in 2024.

Valuation Multiples: Deals Above $5M Recovered From Q4 ‘22 But are Below Q4 ‘21 Peak

During Q4 2023, multiples for transactions between $5 million and $50 million remained below the Q4 2021 peak, but increased relative to multiples in Q4 2022. For transactions below $5 million, multiples remain in a fairly tight range. For details on valuation and how a small business owner can improve their valuation multiple, owners can refer to Section 4 of our Guide to Selling a Small Business.

Charts of valuation multiples by business size.
Year-over-year changes to multiples were relatively flat across transaction sizes, with the exception of an uptick in multiples among deals between $5M and $50M

Buyer Interest: NDA Activity Up in 2023, But Closed Deals Were Flat

Activity from prospective buyers in 2023 increased at the earliest stage of deal exploration. Half of survey respondents reported a higher number of signed non-disclosure agreements in 2023 versus 2022, but only 36% reported that closed deals increased in 2023 versus 2022.

Half of survey respondents noted an increase in signed non-disclosure agreements in 2023, but only 36% reported an increase in closed deals in 2023 versus 2022.

Among deals with a purchase price of $5M to $50M, about one third of respondents report receiving a single offer per deal, while two-thirds received two or more offers per deal.

Image of number of offers per deal.
Among transactions valued at $5M to $50M, two-thirds received two or more offers per deal.

Structure: Earnouts Increasingly Used For Larger Deals

For transactions between $5M and $50M, sale structures with earnouts have grown from about 2% of deals in Q1 2021 to 10% in Q4 2023. With elevated interest rates buyers may find that financing is harder to obtain, which creates funding gaps. Sellers are increasingly bridging gaps with earnouts.

Chart of deals with earnouts.
Ten percent of Q4 2023 transactions in the $5M to $50M range included earnouts, up from 7% in Q3 2023.

Time to Close: Q4 2023 Unchanged Year-Over-Year

Median time to close a transaction remained stable in Q4 2023. Per survey respondents, deals in the $5M to $50M enterprise value range took a median of four months from offer to closing. Median months from process start to close was 10 months.

Exit Planning: Retirement Remains Top Reason For Bringing Deals to Market

Among businesses sold for $5M to $50M, 48% of respondents listed retirement as the number one reason to sell a business. Burnout was the top reason among 13% of respondents, while unsolicited offers represented another 13% of responses.

Image of chart showing why sellers bring a business to market.
Retirement was the top reason sellers went to market, with 48% of respondents indicating that retirement was the catalyst for a sale process.

In the $5M to $50M deal size category, 35% of owners did not complete exit planning prior to beginning the sale process. For deals $5M and below, this figure jumps to more than 57%. Although retirement is a milestone around which owners can plan, many neglect to prepare for business exits.

Image of exit planning participation by deal size.
Exit planning remains an important area of opportunity for small business owners, especially for transactions below $5M in deal value.

In Closing - Structure Flexibility Likely to Persist in a High Rate Environment

With the Fed signaling that rates have peaked, the conversation shifts to timing for interest rate cuts and a subsequent reduction in the cost of acquisition financing. The Fed cites a slowdown in inflation as a key input in determining when rates will be cut. Despite the difficulties associated with forecasting inflation, and therefore timing for rate cuts, it’s a reasonable assumption that the Fed’s target rate will not exceed 5.5%. As rates level off, appetite for risk may increase which could benefit the merger and acquisition market. In the interim, flexible deal structures, including earnouts, seller debt, and rolled equity, will bridge the gaps created by financing challenges.

Regardless of the rate environment, preparation remains a critical step for owners considering a business sale. It’s no coincidence that as deal sizes grow so too does the percentage of sellers that have engaged in exit planning. Business owners have no shortage of responsibility and at times it feels like planning is another bandwidth constraint. But as the data above show, owners who actively engage in exit planning are not just well prepared to sell their business, they realize stronger business growth and deal outcomes. 



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