Feelings Aren't Facts: Dispelling Myths About The Current M&A Marketplace

GRAND RAPIDS, Mich. - Aug. 11, 2020 - PRLog -- Q2 numbers are out regarding M&A transactions and the data point to an interesting and counterintuitive set of dynamics in the marketplace. In short, there are two feelings that appear to be omnipresent but misguided: 1) among sellers, there is the feeling that now is a bad time to sell; and 2) among buyers, there is a feeling that they are missing out on bargains.

Seller Sentiment

It's not good. According to the IBBA's Q2 2020 Market Pulse report, "Seller market sentiment dropped to record lows this quarter, falling well below levels seen during the last eight years."

According to Scott Bushkie, Managing Partner, Cornerstone Business Services, "We've talked with multiple private equity firms, and they're estimating the flow of potential new deals coming their way is down 50-70% over 2019." In short, sellers have pulled back from going to market.

Buyer Sentiment

According to BizBuySell.com's Q2 2020 Insight Report, over the same period (April-June 2020) that small business transactions dropped 39%, "the number of buyers searching and inquiring about businesses on BizBuySell recovered then eclipsed pre-pandemic levels."

Just as in 2009, many buyers are newly unemployed, 28% presently. Other buyers are business owners themselves, looking to expand their footprint or add products and services through vertical integration. According to Kyle Griffith of The NYBB Group (https://nybbinc.com/about-us/our-professionals/kyle-griff...), "In the $5 million and up sector, private equity made 5x the acquisitions over existing companies in Q2. That's a significant presence and one we haven't seen to such an extent in the past." In short, buyer demand is surging.

Business Valuations Are Holding Up!

Fundamentally strong businesses are experiencing buyer competition and quality deals are receiving full prices. According to IBBA data, "in Q2, median final selling prices came in anywhere from 89% to 100% of pre-set asking price or internal benchmark. Lower middle-market companies in the $5 million to $50 million range achieved the highest values at 100% of benchmark."

According to BizBuySell data, the median sale price of businesses sold in Q2 rose 6.1% compared to 2019. According to the report, "This point may serve as a rude awakening for the 58% of surveyed buyers looking for a business while expecting a favorable price."

Our Experience At Calder

Our experience has been very similar to the broader market.  Those sellers whose businesses have held up well and have decided to go to market have experienced intense buyer interest, multiple offers, and accepted letters of intent (LOI) at or above the original benchmarked valuation.

In summary, for businesses that have demonstrated strength, now is an excellent time to sell: buyer demand exceeds pre-pandemic levels leading often to competitive offers, valuation multiples are holding up, and cash at closing is remaining strong.