The market for privately held business entities is usually divided into two segments: Main Street businesses and the Middle Market. Main Street generally refers to businesses with gross annual revenue of less than $5 million. Above this, businesses are considered to be in the Middle Market space.
Main Street Activity
BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported recently that the number of annual small business transactions stabilized in 2015, ending the year down just 3.6 percent from 2014’s record high.
A total of 7,222 closed transactions were reported in 2015, nearly matching the 7,494 transactions in 2014, which was the highest total reported since BizBuySell started tracking data in 2007. The significant drop in number of restaurants sold in 2015 accounted for the slight drop in total transactions. Sales of all other business categories except restaurants were up over the previous year.
The median revenue of sold businesses in 2015 grew to $449,462, up from $417,562 in 2014 while the median cash flow grew to $102,000 from $100,000 in 2014. Improved financials allowed sellers to both ask for and receive a higher price for their businesses in 2015. The median sale price increased a solid 7.6 percent year-over-year, from $185,000 to $199,000.
“Overall, the business-for-sale market remains strong. Business financial indicators are strengthening and owners are receiving stronger valuations, leveling out what has been a strong buyer’s market in recent years,” said Bob House, Group GM of BizBuySell.com.
The following graph shows business valuation averages of small businesses sold over the last 5 years expressed both as a multiple of cash flow. Cash flow, which is also referred to as discretionary earnings, is net income plus interest, depreciation, amortization, owner's compensation, and personal expenses. In other words it is EBITDA plus the owner's salary and personal expenses he or she may run through the business.
This demonstrates how the valuation multiple of cash flow increases significantly with increasing cash flow.
“Small business indicators continue to point toward a healthy market for buying and selling,” House said. “While both sellers and buyers should keep their eye on the upcoming election and possible regulatory changes, it’s unlikely either event would unhinge what has been an increasingly active business-for-sale environment. As small business financials improve and the market finds its balance, transaction activity should continue to be strong in 2016.”
Middle Market Activity
The Middle Market overlaps the low end of Main Street but is generally regarded to consist of businesses with gross annual revenue of $5 million or above.
Although there are individual investors in the Middle Market, the dominant players in the space are Private Equity (PE) firms. A Private Equity firm is an investment group that makes investments in privately held operating companies through various strategies including leveraged buyout, venture capital, and growth capital. Each firm will raise funds that will be invested in accordance with their specific criteria.
There were a record number of Private Equity firms organized in 2015. Globally, Private Equity groups are sitting on a record $1.3 trillion of cash and actively seeking attractive investment opportunities. Fundraising continues strong with PE groups raising $271 billion in 2015. This situation almost guarantees that 2016 will be a very good year for sellers of middle market businesses.
Interestingly, some economists have said the downturn in the public markets (ie: stocks listed on the New York Stock Exchange and other markets) will actually fuel the flight of investors from the publicly listed securities into the Private Equity firms.
Several specialists in the Middle Market predicted that the technology, healthcare, manufacturing and telecom sectors would be particularly strong in 2016. Conversely, they listed oil and gas, retail, and food and beverage as weak categories.
Across the board from mom and pop businesses through Main Street into the Middle Market, it appears that 2016 will be a good year for individuals who are planning to exit their business.
In a January survey of the membership of the American Business Brokers Association, which is composed of both Main Street and Middle Market intermediaries, 76 percent of the respondents said they expected 2016 to be more active than 2015. Only one percent expected this year’s activity to be lower than last year.