MBB From Brian

Market Summary FALL 2015

September 11, 2015

Summer is behind us—didn’t that seem to go quickly? And as always market activity picks up after Labor Day as people settle back into work, kids are off to school and business owners ponder and think about 2016.  I skipped a Summer Market Summary and I usually focus on “what’s hot and what’s not” in terms of salable businesses. A five month gap has given us a different perspective on trends; more macro, less micro. This Market Summary will take a look from a different perspective.

Buyers by type

Individual Buyers. Individual buyers used to be the “bread and butter” of the business brokerage world, accounting for 70% of buying activity in the Main St. market. Since 2009 the individual buyer market has been very weak, the economic downturn affecting the middle class, reducing individual net worth and costing billions in home equity.  Combined with a pull back by banks, Main St business activity and values has been low over the past few years. Recently we have seen a significant increase in Main St. buyer activity and encouraging trends in banks willingness to finance smaller acquisitions. We expect to see an increase in deals between $250,000 and $750,000 over the next couple of years. This is encouraging, especially for retiring baby boomers who need to realize a fair market value for their business in order to retire.

Industry Buyers. “Growth through acquisition” activity is still strong but outdated businesses are being passed over. Minimal goodwill value, obsolete systems, aging ownership and weak market position could make your business unattractive. A competitor or synergistic buyer might just wait for the business to fold and then take over the product line or territory without having to pay for it. If you are a smaller competitor you may want to consult with your advisors. We see this trend continuing and putting downward pressure on values. Selling sooner rather than later may be advantageous.

Financial Buyers. There is still an enormous amount of cash looking for investment opportunities. Hoping to secure better than market returns, many of these investment entities are looking for “risk free” businesses: competent management in place, recurring revenues, secure market niche, protected IP or product line etc.  At the same time these investors are hoping for a leverage deal to minimize cash outlays. Demand for these types of business are very strong so sellers have the negotiating advantage.

Industry Disruptions

Technology has always been a destructive and creative force in the economy but it could be argued that the pace of change and disruption are increasing. Hard lessons of the “buggy whip” or “Kodak” are being replaced with lessons of the “shared economy” (Uber, Homeaway, etc) and smaller businesses might not have the resources to adapt to the changing environment. To be very frank, we are seeing more and more businesses becoming “unsalable” due to rapid changes in market technologies. Business owners should do a SWOT analysis or understand the forces that are affecting their industry. These future changes could determine the best time to sell your business—having your “head in the sand” could preclude you from a viable exit strategy. 

Two overarching forces that are impacting, or will impact, numerous industries.

Distribution. Amazon has revolutionized distribution and captured a large share of the consumer goods market. Now they are pushing into business fulfillment services and B2B markets. (Auto parts for instance). Small businesses that need to carry a large and varied inventory to be competitive may be at risk. Amazon Prime 2 day delivery and the systems behind it may be a competitive threat. However, Amazon is also pairing up with regional distributors and businesses to fill gaps in their distribution systems and to maintain delivery times. Rather than compete you may want to see how your business can adapt and take advantage of these changes.

Additive Manufacturing. Perhaps no technology may be more disruptive than 3D manufacturing. Bypassing a distribution product and just-in-time delivery system for a “build when needed” is incredibly efficient but also very disruptive to a number of business models. Small wares, replacement parts, hobby goods and similar businesses are already being impacted by 3D printing.

Understanding where your business is in the “Industry Lifecycle” could be critical in both adapting your business to changing technology but protect the enterprise value when it comes time to exit. 

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