TL;DR
Here are the 5 main points simplified into bullet points with related statistics:
- Main Street valuations steady, but compression in larger deals (median multiple for deals above $5MM dropped from 5.3X EBITDA in Q2 2022 to 4.4X EBITDA in Q2 2023)
- Time to close increased, especially for over $5MM deals (average time from LOI to close jumped from 5.1 months to 6.8 months for deals above $5MM)
- Construction/engineering deals dominate activity across segments (39% of closed lower middle market deals $2MM-$5MM)
- First-time buyers key for Main Street, strategics dominate larger deals (first-time buyers 45%+ for under $2MM deals)
- Seller financing on the rise (reached 89% for deals $2MM-$5MM)
Full Blog Post
The International Business Brokers Association (IBBA) and M&A Source recently released their Q2 2023 MarketPulse Survey Report, providing insights into middle market mergers and acquisitions activity. The survey polled 413 business brokers and M&A advisors on trends across main street (under $2MM) and lower middle market ($2MM-$50MM) deals. Here are 5 key takeaways from the report:
Introduction
The M&A market saw some shifts in Q2 2023 amid economic uncertainty. While deal activity remains robust in some sectors, advisors reported a dip in overall seller confidence. Tight lending conditions also persist, especially for larger deals, impacting timelines. Yet each market segment, from main street to lower middle market, continues to have unique dynamics worth noting.
Point 1: Main Street Valuations Hold Steady but Larger Deals See Compression
On average, main street business valuations remained stable from Q1 to Q2 2023, with no significant decrease in median multiples. However, the median multiple for lower middle market deals above $5MM dropped nearly a full point year-over-year, from 5.3X EBITDA in Q2 2022 to 4.4X EBITDA in Q2 2023. This compression indicates rising interest rates are impacting larger deals. As one advisor noted, “Buyers are paying much more in interest now. Thus, they either put in a lower price or accepted smaller returns, and right now the lower price appears to be winning.”
Point 2: Time to Close Increases, Especially for Larger Deals
The time it takes to close a deal increased across most sectors, but the jump was most significant for deals above $5MM in value. For these larger businesses, the average time to close from letter of intent increased from 5.1 months in Q2 2022 to 6.8 months in Q2 2023. Advisors cited lender reluctance as a key driver of delays for larger deals in the current climate.
Point 3: Construction/Engineering Deals Dominate Across Segments
From main street to lower middle market, construction/engineering deals led activity in Q2 2023. For example, construction/engineering represented 39% of closed lower middle market deals between $2MM-$5MM. Advisors attribute this spike in part to new infrastructure spending and the desire for scale via M&A in the competitive construction industry.
Point 4: First-Time Buyers Key in Main Street, Strategics Dominate Larger Deals
In the main street market under $2MM, first-time buyers accounted for 45% or more of completed deals. But at $2MM and above, strategic acquirers became the top buyers, seeking horizontal add-ons. Private equity also played an increased role, targeting add-ons and platforms. This demonstrates the diversity of buyers across deal sizes.
Point 5: Seller Financing on the Rise
The percentage of sellers providing financing jumped across all sectors, reaching 89% for deals $2MM-$5MM. With uncertain lending conditions, sellers are stepping in to bridge financing gaps more than ever. This allows deals to push forward despite market headwinds.
Summary
The IBBA MarketPulse report provides unique insights into an evolving M&A landscape in 2023. While conditions appear tougher for larger deals, there remains strong demand among strategic buyers, first-time entrepreneurs, and others to acquire businesses across valuation ranges and industries. Advisors anticipate market fluctuations ahead but overall remain optimistic for M&A deal flow.