There are about seven million baby boomer business owners. Two-thirds of those owners plan to sell their businesses. It is estimated that over $4.5 million businesses could be sold over the next 20 years, an average of more than 225,000 per year going to market.
Given the number of companies potentially coming to market, business owners need to focus on improving profitability; building a management team; and growing revenue, in order to make their companies more attractive and to maximize the proceeds they receive at the time of exit. A number of these companies have not been able to sell as a result of the economic downturn. As the economy recovers, these businesses will come flooding into the market.
The Great Recession has had a dramatic effect on all assets classes, including businesses. It became evident to business owners that, since their sales and profits were down, their chances of getting an adequate value for their business also diminished. But how much longer can they wait and keep running their businesses? And, they reason, if the economy improves, won't more businesses come to market as profits rise? It is very possible that in the near future buyers may have many more businesses to choose from, which could have a detrimental effect on rising values.
Market Segmentation
Generally, M&A Intermediaries categorize a business as small if it earns less than $1 million in profit, regardless of the revenue. These companies are most often sold by business brokers, as opposed to investment bankers. The next size up is the lower middle market, defined as companies with values of $5 million but no greater than $75 million. Corresponding profit (EBITDA) is usually between $1 million and $10 million.
Above that is the middle market tier of companies, generally more than $100 million in sales but less than $500 million, regardless of profit. Both the lower middle and middle market are served by investment bankers or similar intermediaries. Of course there is always overlap in these markets as opportunities arise; bigger firms will occasionally do smaller deals and smaller firms my do larger deals.
Intermediaries/investment bankers are often asked about multiples; there is no rule of thumb answer without performing some market comparable analytics, as well as considering the specific and unique attributes of the seller. Beware of false promises of value before someone has properly researched your company.
The primary distinctions between business brokers and FINRA registered Broker Dealers (investment bankers) are:
- Brokers are governed by real estate statutes and do not receive retainers or upfront fees.
- Broker transaction (success) fees are usually higher than bankers, since all of the fee is back loaded.
- Investment bankers perform significant due diligence and provide that documentation to qualified, prospective buyers.
- Brokers can sell assets, not securities. If a transaction is large enough and involves securities/stock, only registered Broker Dealers can legally negotiate that sale.
Mentor Securities
Mentor Securities is a FINRA Broker Dealer, providing services for lower middle and middle market sized deals. We are very selective about which sales or financing transactions we will accept. We expect our ratio of closed transactions (versus all retained clients) to exceed 90%. Archiving that high level of success is dependent upon matching our senior experience and expertise with realistic client goals. Our blog next month will provide information on our pre-sale planning services.