Jon Feld, Editor, Salem Five OnBusiness

What motivates business owners to sell in the current market? According to the December 10, 2012 Market Pulse Survey Report by the International Business Brokers Association (IBBA), M&A Source, and Pepperdine University’s Graziadio School of Business and Management, for businesses valued at $5 million and above, potential tax increases is the primary driver. For businesses valued under $5 million, retirement was the number one reason for sales across all. The second most common reason was burnout and third was “new opportunities.”

The majority of owners surveyed—nearly 60 percent—expected fewer sellers would go to market until they had better clarity on the future. Twenty-six percent reported that they thought more sellers would try to close a deal before the new taxes take effect.

Regarding the core sales motivation, “baby boomers represent more than half of the business owners in the U.S. and many are selling their businesses in order to have a comfortable retirement,” notes Chet Walden, president of M&A Source. “Businesses over $5 million in value had more money to lose and [are] more keenly aware of the large potential tax increases coming in 2013. They decided to sell in 2012 in hopes of netting out more than they could after the new taxes take effect.”

For those businesses still waiting to sell, Dr. John Paglia, director of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University’s Graziadio School of Business and Management, believes that that many are waiting to move 2009 off their three-year-trailing financial reports. “Most sellers had a poor financial performance in 2009, and moving past that may make their businesses more sellable” he explains. “They’re hopeful that better numbers will net them a little better value—even with the tax implications in consideration.”

Scott Bushkie, marketing chair for IBBA describes the current environment as “a shift from a buyer’s market to a seller’s market.” which reflects the number of buyers coming into the marketplace. Economic uncertainty and fiscal cliff issues may have resulted in fewer sellers, giving the upper hand to the business owners that are looking to sell their companies now. “It is Econ 101: more buyers—with unprecedented amounts of cash—than sellers, sellers have the advantage,” he adds.

Other key Market Pulse Survey Report findings include:

• A fairly significant increase in cash at close. For Q2, cash at close accounted for roughly 50 percent of deal financing across most sectors. For Q3, cash at close was at approximately 70 percent to 75 percent across all but the $5 million-plus deals.
• Private equity purchases were almost nonexistent until opportunities reached $5 million in value. In this study, private equity dominated purchases of $5 million and above, at 68 percent of deals closed. Of those, nearly all were add-on acquisitions with one private equity platform deal.
• For Main Street businesses, buyers were primarily individuals (75 percent). Of those individual buyers, more than half (percent) were first-time buyers.
• In terms of where buyers were located in relation to the businesses sold, notably, deals over $5 million in value garnered the largest percentage (88 percent) of out-of-state buyers. Local buyers within a 20-mile radius were the most common buyer group until deals exceeded $5 million in value. Less than 10 percent of businesses in all sectors were sold to an international buyer.