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Fourth Quarter 2021 IBBA and M&A Source Market Pulse Survey

The IBBA and M&A Source Market Pulse Survey is conducted quarterly 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 is conducted with the intent of providing a valuable resource to business owners and their advisors. The results are in, and here is a summary of the results of the survey.

Market Outlook Positive for 2022

Deal activity continued at an intense pace in the fourth quarter of 2021, as advisors reported an uptick in both incoming deal flow and completed engagements. More advisors characterized this as a seller’s market than nearly any other time in the survey’s 10-year history.

Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0 (another survey peak), realizing an average final sale price at 113% of benchmark. Meanwhile, time to close shrank in nearly all market segments. Time to close was likely facilitated by the higher rate of buyer competition as well as a push to get deals closed before year- end.

A number of economic factors are driving M&A. High levels of dry powder, the availability of debt, and the favorable cost of debt are key factors contributing to market momentum. The competitive labor market may also be playing a role. When organizations can’t find the talent they need to staff expansion plans, acquisition presents an alternate strategy to grow.

Notably, concerns over proposed hikes in the capital gains rate may have driven some sellers to market in 2021. While those tax increases did not come to fruition, some business owners will be watching the 2022 midterm elections to gauge the political winds and time their exit accordingly. Others may still decide to go to market in early 2022 to stay safely ahead of potential changes.

Business Value

On average, business valuations have held relatively steady in the Main Street market, varying from 2.0-3.3x SDE. These multiples have remained consistent over the history of the survey. Shifts are more likely in the lower middle market, however, as businesses become more attractive targets to financial and strategic buyers alike.

Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0x EBITDA (a survey peak) and realized an average final sale price at 113% of benchmark.

MEDIAN MULTIPLES INCREASE WITH COMPANY SIZE/ENTERPRISE VALUE

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Note: Deals under $2MM are multiples of Sellers Discretionary Earnings (SDE) which is the cash flow available to a full time working owner operator, including their salary. Deals over $2MM are multiples of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

Time Needed To Close

The average time from engagement to closing shorted slightly at the end of 2021. The chart below shows the average number of months by deal size. Not surprisingly, the larger the deal, the average time to close increased.

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If you are interested in knowing more about the survey or about the prospect of
selling a business in a certain industry, please feel free to contact us.

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