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Market Pulse Survey Results for Quarter One

 

 

The Market Pulse survey is a national survey of business brokers that is conducted quarterly with the intent of providing insights into the Main Street and Lower Middle market business landscape. Back in April, the 2024 Q1 Market Pulse survey was published. Comprised of 321 business brokers and M&A advisors, the survey covers the 254 transactions completed from January through March of this year.The Market Pulse Survey categorizes Main Street as businesses valued between $0 and $2,000,000 with the Lower Middle market categorized as businesses valued between $2,000,000 and $50,000,000.  A summary of the current market conditions based on the data published in the survey follows:

 

COVID

 Four years after the initial shut down, businesses are still being affected. Everything from customer buying habits, staffing, and supply chains have all been heavily impacted. This has made for a very challenging time for business owners.

The great news for Sellers is that Buyers appear to be largely unconcerned with any covid related slumps provided that the business has rebounded. While Main Street buyers have typically asked for three years of financial performance when deciding the value of the business, sellers should be prepared to go back a little further when possible. By doing this, sellers will be equipped to address any potential Covid concerns by having their 2019 financials ready at hand.

Even though buyers are willing to overlook the Covid slump, there are some accounting matters that could make a sale more difficult such as management of PPP, ERC, and EIDL grants and loans. EIDL loans in particular can present a challenge to both buyers and sellers. EIDL loans are difficult to assume (take over from the seller) and if not assumed they must be paid with the proceeds of the sale.  Because EIDL loans were emergency loans aggressively marketed to business owners whether they were needed or not, they can cause the debt ratio of the business to be out of balance with the market valuation (based on cashflow and a debt free assumption of the business, The idea that such a percentage of the purchase price would be consumed by debt repayrment  has made more than a few deals falter at the finish line because the sale became financially unattractive to one or both parties.

 

VALUATION

Multiples, used to calculate the market value of a business based on revenues or sellers discretionary earnings, have stayed relatively stable.  We can see this by examining the ratio of the selling price to the asking price of businesses over time. For Main Street businesses, the selling prices were 86% to 95% of the asking price over the last 4 years showing the multiples have stayed relative stable, between 2x and 3x depending on the deal size. Larger deals tend to have slightly higher multiples.  The Lower Middle market, has also remained relatively stable over the past 4 years with multiples falling between 4x and 6x.

While the multiples for Main Street businesses in the $500k to $1M range have slipped a little, it is not a major change with multiples moving from 2.8x in 2021 and 2022 to 2.5x in 2023 and 2024. In our opinion this is largely do to interest rates and the prevalence of SBA lending in this sector. Many banks are tightening their criteria and demanding higher cash flow to debt ratios which makes the higher multiples more difficult to finance, driving the prices down.

 

BUYERS

For Main Street businesses 75%-90% are first time buyers or serial entrepreneurs. Very few (around 20%) are purchased by strategic buyers (existing companies or investment groups). 30-40% of the buyers intend to work full time in the business, essentially buying a job. 70-80% of the buyers live within 100 miles of the business that they purchase.

If you are a buyer or seller and have questions about the market, give the Liberty Group of Nevada a call!