The Irony of Rising Business Values

The M&A market does not usually respond well to times of uncertainty, such as election years. But in Q3 2020, in a time of uncertainty on top of uncertainty, we are seeing record buyer interest.

The issue is largely one of supply and demand. Business owners, believing that the pandemic can’t possibly be a good time to sell, are holding back. And that imbalance is driving up values. Here’s what we’re seeing:

Declining deal flow: According to BizBuySell’s 3rd quarter Insight Report, owner confidence fell to a new low. Owners believe they would have received a better value if they had sold last year.

However, there’s plenty of interest in pandemic-proof businesses, i.e., those that have weathered the pandemic relatively unscathed as well as those that were able to bounce back.

According to the 3rd quarter Market Pulse report, sponsored by IBBA and M&A Source, lower middle market businesses valued at $5 million or more received an average 105% of the internal benchmark set before going to market. And businesses on the smallest end of the market, those valued under $500,000, received 90% of their asking price in Q3, a one percentage higher than last year.

The BizBuySell Insight Report shows similar results, as the median sale price of businesses sold in the 3rd quarter grew 20% over a year ago.

Buyers still well-funded: Private equity groups are still sitting on record levels of cash that they need to put to work in the marketplace.

Main Street buyers want control: In addition to subsidies and government incentives unemployment is pushing some new buyers to market. According to BizBuySell 27% of Main Street buyers are newly unemployed and looking for more control of their future.

The takeaway is, if you’re doing well through the pandemic, this may still be an opportune time to exit your business. Pandemic-proof businesses that are performing well are still sought after and, due to their popularity, are getting better values than a year ago.

However, if your performance has suffered, and you have enough cash to make it through, you may be better off holding until your business recovers. If you don’t have sufficient cash reserves, talk to your advisors about whether you’re better off selling now, before you experience further declines.

Jim Friesen, MBA, CPA, CMA, CM&AA

Partner | M&A Advisor