The quarterly IBBA and M&A Source Market Pulse Survey aims to give an accurate understanding of the market conditions for businesses being sold in Main Street (values $0-$2MM) and the lower middle market (values $2MM -$50MM). The survey was conducted January 1-15, 2022, and respondents consisted of 416 business brokers and M&A advisors. Keep reading for key takeaways from the survey.

The market looks good for 2022: Deal activity continued at an intense pace in the fourth quarter of 2021 as advisors reported an uptick in both incoming deal flow and completed engagements.

It’s still a seller’s market: More advisors characterized this as a seller’s market than nearly any other time in the survey’s 10-year history. Businesses with enterprise value of $5 million to $50 million earned an average multiple of 6.0 (another survey peak), realizing an average final sale price at 113% of benchmark.

What’s driving M&A: Competitive labor market, high levels of dry powder, availability of and favorable cost of debt.

Stay informed: Pay attention to the 2022 midterm elections to gauge potential hikes in capital gains taxes and any other potential changes.

What happened in 2021: For the first time in the survey’s history, advisors reported on deals negotiated in 2021.

Deal Term Trends in 2021

The following summarizes current trends in non-compete, seller transition, and seller employment agreements for Main Street and the Lower Middle Market:

Non-Compete Period

Survey responses show that three to five years is the prevailing non-compete period.

Seller Transition Period

In the Main Street market, 30% of sellers provided less than one month of transition support, 22% provided one month, and 27% provided two months or more. In the Lower Middle Market, 13% of sellers provided one month of transition support, and 24% provided two months or more.

Seller Employment/Consulting

Survey responses show that seller employment agreements (of one month or more) were used in 16% of Main Street deals and 31% of lower middle market transactions.

M&A Activity

Advisors reported that 46% of their engagements terminated without closing in Q4 2021. This is one of the lowest termination rates reported in survey history.

Deal Financing

Deal financing has not changed significantly since before the pandemic. On average, sellers continue to receive 80% or more of total consideration as cash at close. (Cash at close includes senior debt and buyer equity.) Seller financing accounts for 15% or less of most deals.

Industries that led in 2021

Main Street Market: Personal services, construction, business services, and consumer goods/retail.

Lower Middle Market: manufacturing, construction, and wholesale/distribution.

Who’s buying

First-time buyers dominated the Main Street market, followed by serial entrepreneurs and existing companies.

Why the uptick in first-time buyers? The survey suggests that the competitive labor market is driving businesses to look to acquisition instead of talent.

What does this mean for 2022? Keep a positive outlook in what continues to be a seller’s market driven by a competitive labor market.

Full Report: https://masource.org/wp-content/uploads/2022/02/MP_ER_Q4_2021.pdf