• National Report: Move to Buyer’s Market and Increasing Earnouts

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    August 10, 2020
    While many small business owners are struggling to keep their doors open, a recent survey of business brokers and M&A advisors reveals about half of small and medium business owners can no longer get to the closing table as they face cancellations or delays in selling their businesses again in the second quarter

    According to the Q2 2020 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, business brokers representing small businesses valued at less than $2 million report 36% of their deals have been delayed and another 16% were cancelled due to the COVID-19 pandemic. Similarly, M&A advisors representing businesses valued between $2-$50 million said 37% of their deals had been delayed and another 10% were cancelled, an improvement from Q1’s 60% cancelled or delayed deals.

    Year-over-year trends show a slight downtick in cash at close in most sectors with corresponding increases in seller financing and/or earnouts.

    “We expected to see an increase in earnouts due to COVID-19. With potential new shutdowns ahead and ongoing economic uncertainty, earnouts represent a way for buyers to reduce risk,” said Lisa Riley, Principal, Delta Business Advisors.  

    Seller-market sentiment dropped significantly in Q2 2020. In the $5 million to $50 million sector only 39% of advisors described the market as a “seller’s market” compared to only 13% of advisors in the less than $500 thousand sector.  Across all thresholds, seller-market sentiment is at record lows since the Market Pulse began in Q2 2012, indicating a strong buyer’s market.

    “It will be interesting to see if this is just a blip or a true trend over the next couple of quarters,” said Robert McCormack, Managing Partner, Murphy McCormack Capital Advisors. “Private equity still has a lot of cash and ticking time clocks on their portfolios. Fundamentally strong businesses will still find buyers, despite the strongest headwinds we’ve seen since the Great Recession.”

    What’s selling? “In the Main Street market, restaurants and consumer goods/retail led the smaller transitions and in the Lower Middle Market, construction/engineering, manufacturing, and consumer goods are dominating industry transitions,” said Jeff Moody, Managing Intermediary of Emerald Coast Business Intermediaries in Destin, Fla.
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