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Survey: Waning seller’s market for sale of small businesses signals a peak in the market

Written on Jun 12, 2019

A new survey reveals that seller’s market sentiment is down in all market segments except for businesses with $5 million to $50 million in enterprise value.

Looking back a year, seller’s market sentiment has decreased notably for businesses valued between $1 million - $2 million, dropping six percentage points from Q1 2018 (72%) to Q1 2019 (66%). According to the Q1 2019 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project seller’s market sentiment increased for businesses valued $5 million to $50 million rising from 77% in Q1 2018 to 81% in Q1 2019.

“This is the first time in years that we’ve seen four out of five sectors report a dip in seller market sentiment. This is a sign the market may have peaked and more people are expecting a correction in the year or two ahead,” said Craig Everett, Ph.D., director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. “Sellers should consider selling now or waiting another few years before the market will cycle back up to current conditions. To be clear, this doesn’t mean you won’t be able to sell your business over the next few years, but you probably won’t get the multiples you can get today. Any market pessimism or uncertainty will drive down value across the board.”

The final sale price of businesses varied depending on its valuation according to the Q1 2019 Market Pulse Report. Lower middle market companies in the $5 million to $50 million range had the highest the final sale price at 101% of benchmark. On the other hand, small businesses valued under $500,000 had the biggest drop from their asking price with final sale prices going from 91% of the pre-set asking price in Q1 2017 to 85% in Q1 2019.

“Businesses with enterprise value of $5 million or more are most in demand right now. The market is not cooling at all for those sellers,” said Gary Papay, managing partner of IBG Business. “That’s reflected in supply-demand sentiment and multiples.”

The report also found that the majority of small business owners fail to plan for the sale of their business. Advisors indicated that 90% of business owners with enterprise value of less than $500,000 conducted no formal planning prior to engagement. Lower middle-market business owners were more proactive, although roughly 48% also failed to make advance plans to sell. Advance planning can help sellers receive the highest market value and decrease the amount of time it takes to sell their business.