M&A Transaction Valuations for Small Businesses Fall in Q2, Increase for Mid-Sized Businesses

M&A Transaction Valuations for Small Businesses Fall in Q2, Increase for Mid-Sized Businesses

Small business owners, wary of economic uncertainty, become more realistic about their sales valuations

Continuing a multi-year trend, information technology companies are the most the most sought-after business acquisitions valued in the $5 million to $50 million range, according to the Q2 2017 Market Pulse Report. Manufacturing companies remained the most popular acquisition target in the $1 million to $5 million range, despite national headlines about outsourcing of jobs and companies moving overseas. Healthcare and biotech companies were the third most popular target, after IT and manufacturing, in the $5M to $50M range.

The Market Pulse Report also found that although 72% of the participants received multiple offers on their most recent deals for their clients, the business marketplace is becoming more of a buyers’ market, most notably for businesses valued under $2 million, compared to the same quarter last year. This means that buyers have an advantage in price negotiation and sellers are realizing they have to be more realistic with their financial expectations.

Median EDITDA Multiple vs Transaction Size (all industries)

Transaction Size EBITDA Multiple for Q2-2016 EBITDA Multiple for Q2-2017 % Change
< $500K 2.5 2.0 -20.0%
$500K – $1M 3.0 2.5 -16.7%
$1M – $2M 3.9 3.3 -15.4%
$2M – $5M 4.0 4.3 +7.5%
$5M – $50M 5.1 5.4 +5.9%


“Political and economic uncertainty is causing the shift to a buyers’ market,” said John Howe, M&A Source Chairperson. “Sellers are becoming anxious about closing their deals and as a result, they are becoming more lenient about the sale price and the terms and conditions.”

Retirement still the top reason for selling

A desire for retirement continues to be the top reason for selling a small to medium-sized business. In the $1 million to $2 million sector, advisors reported retirement and burnout were equal motivators to sell, marking this as the rare quarter in which retirement wasn’t the absolute leading factor across every sector.

“We know from experience that a proactive exit strategy yields much higher business values than exiting in burnout mode,” said Lou Vescio, chairperson of the International Business Brokers Association. “Unfortunately, most buyers only really care about the last year or so of business performance, not what you did when you were full of energy and going strong. Waiting until you’re burned out is a common mistake, and business owners can lose anywhere from 20 to 50 percent of value by waiting too long.”

Buyer-types vary by transaction size

The survey found that the most common buyers of companies (32% of all buyers) in the $1M to $2M range are individuals who own other businesses. For $2M to $5M transactions, the likeliest buyer (43% of all buyers) is a company pursuing a strategic acquisition through a horizontal or vertical add-on. Private equity and other investment groups are the leading buyer (47% of all buyers) of companies from $5M to $50M.


About the Market Pulse Report

The Market Pulse Report is published by the M&A Source, IBBA, and the Pepperdine Private Capital Market Project. The report compares conditions for businesses being sold on Main Street (values of $0 – $2 million) to those being sold in the Lower Middle Market (values of $2 million – $50 million). The Q2 2017 survey was completed by 293 experienced M&A advisors and brokers representing 38 states in the U.S. The respondents closed 266 transactions in the quarter.