Various M&A market reports for the third quarter of 2023 provide valuable insights into the latest trends in the small mergers and acquisitions landscape. Calder Capital and Small Business Deal Advisors have also released its financial and closed transaction results for the same period. Reviewing these reports provides prospective buyers and sellers with an understanding of current market conditions for informed business decisions.

Small business acquisitions grew a modest 2% year-over-year in Q3 2023, continuing steady gains following a 13% drop in Q4 2022. This indicates market-adjusted confidence among buyers and a potentially favorable climate for small business sales.

High-interest rates and the disappearance of many senior lenders from the transaction stage for the smallest of businesses have motivated buyers and sellers to look for other solutions. Activity shows that buyers and sellers are effectively working together to close deals, using seller notes, earnouts, and employment agreements to bridge valuation and financing gaps. As SBA loans tied to the prime rate become more costly, financing strategies and deal structures are evolving. With less cash available to pay off debts, lenders and buyers are often asking sellers to carry higher levels of financing.

Calder Capital and Small Business Deal Advisors observed a strong level of buyer interest throughout 2023. By the end of Q3, the team closed a total of 35 transactions and ended the quarter with 28 clients under exclusive Letter of Intent (LOI).

According to the BizBuySell’s Business for Sale Confidence Index, small business owner sentiment remains grim, nearly matching the record dip seen in 2020 during the peak of pandemic-related uncertainty. This pessimism has led to fewer sellers listing their businesses, resulting in a strong seller’s market. In such a market, quality sellers gain an advantage, making it an optimal time for them to sell. With more buyers than high-quality businesses available, competition among buyers intensifies. Consequently, sellers often achieve higher sale prices and more favorable terms.

“I have been in small M&A for 18 years,” noted Calder Managing Partner Max Friar, “Never before have I seen such competition for quality sellers. Most sell-side clients with $1M+ in EBITDA are receiving 10-15 offers, many of those strong offers. 2023 has transformed into one of the best-seller markets I’ve ever witnessed and that is not what I expected heading into the year!”

According to the BizBuySell Insight Report for Q3, a number of factors are causing the grim outlook for prospective business sellers: 

• 49% of business owners surveyed believe it would be difficult if they were to sell their business today:
  • 37% contribute this outlook to economic uncertainty as the top factor 
  • 29% point to high interest rates impacting buyer purchasing power
• 45% of owners don’t feel 2024 will bring them a higher price.
• 74% of owners point to inflation saying their costs have gone up over the previous year
• 47% say the labor market is not improving and point to the challenges of hiring and retaining employees at a reasonable pace
  • 48% added the recent increases in state minimum wage have hurt their businesses
  • 18% of owners are pausing hiring
• 64% shared interest rate hikes have had a negative impact
  • 46% of owners have raised prices in response to capital becoming more expensive
  • 40% have delayed expansion plans
  • 7% of owners have resorted to layoffs

Despite interest rate increases and capital expenses on the rise, there’s promise of continued business-on-market supply. Experts have been calling for a “Silver Tsunami” of Baby Boomers exiting small business ownership. Time will tell whether 2024 will bring forth this “Tsunami”. While nearly half of owners do not believe they will get a better price in 2024, we believe that the continued “steadying” of factors such as labor, inflation, and interest rates will prompt sellers to exit at greater levels than in 2023. 

In the third quarter, 38% of all business owners surveyed were from the Baby Boomer generation, and nearly half (46%) of those planning to sell their businesses indicated retirement as the reason. However, a significant portion is unprepared for this transition, with 27% admitting to not having their financials organized or a succession plan ready. The best advice for business owners is to start planning early. Proactive planning is crucial for securing a more advantageous position during negotiations.

“Many baby boomers are simply feeling worn out and ready to sell, economic worries aside. Those who weathered the storm of the Great Recession and the pandemic have become adept at adapting and are doing so whenever possible.” -Hannelore Green, Continuous Improvement Director

Buyers, on the other hand, remain optimistic. Facing the highest interest rates in over 20 years, business buyer confidence is higher than sellers and generally positive. 

Regarding buyers’ motivations:

• 44% said they are corporate refugees seeking to leave their current job.
• 16% were newly unemployed and seeking independence.
• 50% of those surveyed have owned a business before, which highlights the serial nature of entrepreneurs.
• 39% of buyers see today’s environment as an opportunity to take on businesses as more and more Baby Boomers retire each day.

However not all Boomers are ready to close shop and some are instead looking to open one, with 20% of buyers identifying as belonging to the Boomer generation.

“Economic uncertainty and job dissatisfaction often result in surges of entrepreneurial activity. That combined with favorable changes via SBA lending programs will likely lead to a continued uptrend at the smaller end of the market” shared Michael Donnelly, Analyst and Business Development Associate at Calder’s sister company, Small Business Deal Advisors.

The manufacturing industry spearheaded growth in the market, posting the largest annual increase. Per BizBuySell, acquisitions in this sector surged by 13% year-over-year in Q3, following a 45% expansion in Q2. Furthermore, purchase prices rose, with the median sale price climbing 28% compared to the same period last year and 36% from the prior quarter. Businesses ranging from lumber and wood products to medical devices remain in high demand.

As more U.S. companies shift away from offshore to domestic production where quality and inventory can be better managed, the manufacturing sector shows glimmers of promise. Additionally, manufacturing was hard hit during COVID and, labor aside, things continue to settle down in the industry. 

Despite the economic uncertainty, a significant interest persists among buyers seeking businesses that have showcased resilience and success in tough market conditions.

Calder Capital typically assists businesses with enterprise values exceeding $1MM. Small Business Deal Advisors, LLC is a sister company with common ownership that offers a discounted commission M&A service offering for smaller businesses. If you would be interested in learning more or listing your business through SBDA, please visit the Small Business Deal Advisors website.

If you would like to view Small Business Deal Advisors’ Listings, please do so here: Small Businesses for Sale.

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including the IBBA Market Pulse, BizBuySell, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights and analysis on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our actionable advice is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.

Newly published 2023 Q3 market reports offer valuable insights into current trends in the mergers and acquisitions market. Additionally, Calder Capital has reported its third-quarter financial and closed transaction results. By examining these reports, potential buyers and sellers can gain a better understanding of the current market conditions and make informed decisions regarding their business strategies.

While larger Middle Market deal activity slowed, small and medium businesses continued to sell on-pace throughout the three quarters of 2023. In addition to the marketplace date, the Calder/SBDA team closed 35 transactions by Q3 2023 and closed out on a record quarter. 

Despite lower confidence levels from sellers in the market,  high demand and low supply are driving a sellers’ market. Sellers that are choosing to sell presently are receiving a lot of attention from buyers.

“I have been in small M&A for 18 years,” noted Calder Managing Partner, Max Friar, “Never before have I seen such competition for quality sellers. Most sell-side clients with $1M+ in EBITDA are receiving 10-15 offers, many of those strong offers. 2023 has transformed into one of the best-seller markets I’ve ever witnessed and that is not what I expected heading into the year!”

In late July, the Federal Reserve raised interest rates for the 11th occasion since March 2022, resulting in the target federal funds rate spanning 5.25% to 5.50%. According to ADP, the private sector added 497,000 jobs in the month of June, more than double the Dow Jones consensus estimate of 220,000. The lack of progress in the Fed’s goal of cooling the job market is an influential factor in additional hikes.

Business valuations held steady according to the IBBA’s Market Pulse. Looking at the last four quarters, we see a stable and rising trend despite chatter in the marketplace and fears of a looming recession.

<$500K – $2M enterprise value is typically reflected as multiple of SDE (sellers discretionary earnings); $2M-$50M enterprise value is typically reflected as multiple of EBITDA

 “We are seeing businesses that have maintained or improved performance through recent years achieving higher than typical levels of interest and selling for healthy multiples. The market remains strong for resilient businesses,” shared Calder M&A Advisor, Jake McDonald.

According to the IBBA’s Market Pulse, which surveyed 413 M&A advisors nationally, buyers in various sectors are originating from diverse sources. Strategic buyers are presently accounting for about 25-46% of activity in the $1MM-$5MM sector. 

Based on deal size, it is important to know your buyer:

Buyers in the <$1MM-2MM sector were:

• First-time buyers (43%), serial entrepreneurs (28%), strategic buyers (25%) 
• Motivated to buy a job (30%), gain a horizonal add-on (28%), vertical add-on (18%) 
• Located within 20 miles (45%) or more than 100 miles (33%) of the seller’s location 

Buyers in the <$2MM-5MM sector were:

• Strategic buyers (46%), first-time buyers (24%), or serial entrepreneurs (17%)
• Motivated to gain a horizontal add-on (39%), vertical add-on (27%), or buy a job (22%) 
• Located more than 100 miles (49%) or within 20 miles (32%) of the seller’s location 

During Q1 and Q2 2023, construction/engineering businesses were in the top three industries purchased across sectors of $1MM-$5MM. This trend persists across the market throughout Q3 of 2023. Furthermore, consumer goods/retail and business services continued to sell at high volumes across the lower middle market during the same period.

Increased demand within the construction/engineering industry is creating healthy valuations and encouraging longtime owners to sell. The $1.2 trillion Infrastructure Investment and Jobs Act, signed into law back in November 2021, allocated funds for roads, bridges, and major projects, and reauthorized the surface transportation program for the next five years. By the fourth quarter of 2025, there will be 872,000 more jobs as a result of the IIJA, according to Moody’s Analytics. Over half of these new jobs (461,000) are in the construction industry.

While transactions have remained resilient in the $1-10MM EV sector, it’s crucial to uphold a proactive approach amidst economic uncertainty. Strategies such as evaluating potential methods to bridge valuation gaps and implementing creative closing structures with earn-outs or seller notes can expedite timelines, enhance closure certainty, and increase overall value.

No matter the complexities of your transaction, Calder’s experienced Buy-Side & Sell-Side teams are equipped to guide you through the process, ensuring that you make informed decisions and employ expertise to cross the finish line.

Overall, the M&A landscape in Q2 2023 showcases a complex interplay of factors that are shaping the decisions and sentiments of buyers and sellers alike. 

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports and resources including the IBBA Market Pulse, the ADP Employment Report, the White House’s briefings, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights and analysis on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our actionable advice is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.

Recently released market reports for Q3 2023 provide insight into prevailing trends within the mergers and acquisitions landscape. Furthermore, Calder Capital reported its third -quarter financial and closed transaction results. Reviewing these resources assists prospective buyers and sellers in deepening their understanding of the present market dynamics, enabling them to make well-informed choices about their business approaches.

M&A activity for businesses in the >$10MM EV sector has slowed. Reports from across the market illustrate that deal value and volume have weakened the larger a deal was in Q3 2023.

In late July, the Federal Reserve raised interest rates for the 11th occasion since March 2022, resulting in the target federal funds rate spanning 5.25% to 5.50%.

Value and volume decrease in the Middle Market are believed in part to be linked to the existing lending environment. Buyers have to consider alternate financing options and work much harder to come up with the necessary funds to execute transactions. Many buyers are paying much more in interest now, resulting in lower offers and hesitation.

Due to tightening debt markets and escalating expenses, platform buyouts faced heightened challenges. As a result, bigger corporations are increasingly concentrating on the small business and lower middle market sectors for add-on acquisitions.

The trajectory of deal activity is anticipated to align closely with the overall state of the economy for businesses in the Middle Market sector. However, quality companies on the market are expected to continue to attract a high level of attention. 

“Despite the headlines of ‘doom and gloom’, we are seeing businesses that have maintained or improved performance through recent years achieving higher than typical levels of interest and selling for healthy multiples. The market remains strong for resilient businesses, specifically in the manufacturing, distribution, and business services sectors.” – Jake McDonald, Senior Analyst

Calder Capital reported robust buyer interest in the market. The team closed a total of 35 transactions and ended the quarter with 28 clients under exclusive Letter of Intent (LOI). Sellers who are considering selling their businesses are receiving significant attention from interested buyers.

$5MM-$50MM EV

The average time to sell businesses with EV of $5MM+ rose by about two months, YoY. 

The 2023 Q3 trends reveal a decline in seller confidence when compared year-over-year which could be attributed to market challenges, including elevated interest rates, stricter lending practices, and concerns of a soft recession looming.

Strategic acquirers continue to dominate middle market M&A activity according to the IBBA Market Pulse, which surveyed 413 M&A advisors nationally. According to the survey, in the $5MM-$50MM EV sector, 44% of deals were closed by strategic buyers (up 5% from Q2) and 33% of closings were attributed to PE firms seeking an add-on deal (up 11% from Q2).

As for motivations in the $5MM-$50MM EV sector, the Market Pulse reported that 39% of buyers were motivated to acquire a horizontal add-on (down 13% from Q2) while 28% were motivated to acquire a vertical add-on (down 2% from Q2).

During the first half of 2023, construction/engineering businesses earned the top spot in industries purchased across sectors of $5MM-$50MM. In Q3, the Business Service industry took the top spot, followed closely by Manufacturing and Healthcare

Impacted by high interest rates and post-pandemic challenges, 2023 Q3 saw transaction volume decrease 22.1% YoY, according to Keybanc Capital Markets’ Quarterly Report.

The report also indicated that Consumer M&A activity declined slightly relative to the previous quarter, with valuations also decreasing to below historical levels. Sales volumes have remained muted, prompting companies to prioritize cost-cutting add-ons, such as vertical integration through logistics acquisitions. Industrial M&A deal activity declined in Q3 as economic uncertainty and high interest rates persisted throughout the quarter. Despite lower transaction volumes, valuations across the sector have risen YoY, approaching recent historical levels. As technology continues to disrupt traditional operations, acquirers will likely look to M&A to boost their competitive edge. Trends such as reshoring have enabled U.S.-based assets to remain attractive, which may drive higher transaction volumes into Q1 2024.

While the current economic climate remains uncertain, there is still significant interest from buyers in acquiring healthy businesses that have proven their resilience and strength in the face of adversity. 

About Market Update:

Calder Capital’s market updates pull the most recent data provided through industry-wide market reports including KeyBanc Capital Markets Report, GF Data, as well as Calder’s internal transactions. Calder takes this information and compiles it into a short report providing insights into current market conditions. Calder’s market update is published each quarter, following the publication of the materials it sources. Our firm’s experience of closing over 40 annual transactions provides us with a uniquely accurate perspective on current market conditions. We offer valuable insights on market segments that can inform strategic decision-making for businesses considering buying, selling, or merging. Our analysis is backed by real-world data and a deep understanding of the complex nuances of the mergers and acquisitions landscape, and we take pride in providing exceptional service to our clients.