Business Brokers Say Fear of a Recession is Driving Down Small Business Valuations
The recession isn't here yet, but business advisors say a looming slowdown is already driving down business valuations. Over half (53%) of business brokers surveyed say a recession is the biggest concern especially for small businesses according to the Q3 2019 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project.
"The market doesn't like uncertainty particularly on Main Street," said Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. "Small business owners are worried that a recession is coming, and trade issues are causing volatility. All that nervous energy means buyers are dialing back a bit ? particularly on smaller market deals."
Uncertainty over the upcoming presidential election is less impactful than a looming recession with 20% of business advisors saying the election next year is impacting the M&A market. The trade wars with China are having a smaller impact on small businesses with 11% of advisors saying they will impact the Main Street M&A market and 27% saying they will impact the overall market.
Even though small business owners continue to provide seller financing as part of the purchase price (approximately 10 to 15%) they generally are receiving more cash at close than a year ago. The biggest jump was for businesses valued between $1-$2MM as 93% of the purchase price was realized at the close of the sale in Q3 2019 compared to 80% of the purchase price in Q3 2018.
"Lenders always like to see sellers keep some skin in the game," said Justin Sandridge of Murphy Business Sales-Baltimore East. "When sellers aren't willing to finance any of the purchase price that sends warning signals to buyers and lenders alike. Refusing to provide seller financing is like holding up a giant ?no confidence' sign and it's likely to scare other parties away from the deal."
About the Market Pulse Report
The Market Pulse Report compares conditions for businesses being sold on Main Street (values of $0-$2MM) to those being sold on the Lower Middle Market (values of $2MM-$50MM). The Q3 2019 survey was conducted October 1-15, 2019 and was completed by 236 business brokers and M&A advisors.
About International Business Brokers Association (IBBA) and the M&A Source
Founded in 1983, IBBA is the largest nonprofit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org or follow the IBBA on Facebook, Twitter and LinkedIn.
Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients' needs and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org, or follow the M&A Source on Facebook, LinkedIn and Twitter.
About Pepperdine University Graziadio Business School
For more than 50 years, the Pepperdine Graziadio Business School has challenged individuals to think boldly and drive meaningful change within their industries and communities. Dedicated to developing Best for the World Leaders, the Graziadio School offers a comprehensive range of MBA, MS, executive, and doctoral degree programs grounded in integrity, innovation, and entrepreneurship. The Graziadio School advances experiential learning through small classes with distinguished faculty that stimulate critical thinking and meaningful connection, inspiring students and working professionals to realize their greatest potential as values-centered leaders. Follow Pepperdine Graziadio on Facebook, Twitter, Instagram, and LinkedIn.
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