Study: Number One Reason for Sale of High-Worth Businesses? Potential Tax Increases
The third quarter Market Pulse Survey Report by the International Business Brokers Association (IBBA), M&A Source, and Pepperdine University's Graziadio School of Business and Management found that for businesses valued at $5 million and above, potential tax increases is the primary driver motivating a sale. Retirement was the number one reason for sales across all businesses valued under $5 million. The second most common reason was burnout and third was “new opportunities.”
The third quarter Market Pulse Survey Report (http://bschool.pepperdine.edu/privatecapital) shows that the threat of the election, fiscal cliff and possible tax increases next year is taking a toll on the M&A market. The majority (57%) of respondents expected fewer sellers would go to market until they had better clarity on the future. A quarter (26%) of respondents said that they thought more sellers would try to close a deal before the new taxes take effect.
“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,” said Chet Walden (Atlanta, GA), president of M&A Source. “Businesses over $5 million in value had more money to lose and were 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 waiting to sell, I think it's safe to assume that many are waiting to move 2009 off their three-year-trailing financial reports,” said 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. “Most sellers had a poor financial performance in 2009, and moving past that may make their businesses more sellable. They're hopeful that better numbers will net them a little better value—even with the tax implications in consideration.”
Compared to the second quarter of 2012, Main Street Market brokers were less likely to describe conditions as a “buyer's market.” As the deal size increased, advisors were progressively more inclined to describe conditions as a “seller's market.” In the lower middle market, advisors described it as a “seller's market” by a 2 to 1 ratio for deals of $5 million and above (41% seller's versus 20% buyer's).
“The shift from a buyer's market to a seller's market reflects the number of buyers coming into the marketplace,” said Scott Bushkie (Green Bay, WI), Marketing Chair for IBBA. “Economic uncertainty and the looming fiscal cliff 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.”
Other key findings:
- Survey results showed a fairly significant increase in cash at close. For Q2, cash at close accounted for roughly 50% of deal financing across most sectors. For Q3, cash at close was at approximately 70-75% 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% 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%). Of those individual buyers, more than half (60%) were first time buyers.
- New in the Q3 survey, brokers and intermediaries were asked where buyers were located in relation to the businesses sold. Notably, deals over $5 million in value garnered the largest percentage (88%) 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% of businesses in all sectors were sold to an international buyer.
The third quarter 2012 Market Pulse Survey may be found on the Pepperdine Private Capital Markets Project website at http://bschool.pepperdine.edu/privatecapital.
About the Market Pulse Quarterly Report
The International Business Brokers Association (IBBA) and M&A Source, in partnership with Pepperdine Private Capital Markets Project, have set a goal to provide quality information on a quarterly basis in order to become the go-to source for Main Street and lower middle market transactions. The “Market Pulse Quarterly Report” gives business owners and their advisors access to current market conditions and trends regarding business sales across the country to help them make well-informed decisions regarding selling their business. It also gives business brokers and intermediaries timely and accurate data to help them build and maintain a successful and sustainable business.
About the Graziadio School of Business and Management
Founded on the core values of integrity, stewardship, courage, and compassion, Pepperdine University's Graziadio School of Business and Management has been developing values-centered leaders who advance responsible business practice since 1969. Student-focused, experience-driven and globally oriented, the Graziadio School offers fully accredited MBA, Masters of Science, bachelor's completion and non-degree executive business programs for business professionals, entrepreneurs, managers and senior executives at all stages of their professional and personal development. More information: http://bschool.pepperdine.edu/newsroom
About International Business Brokers Association (IBBA) and the M&A Source
Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org.
Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients' needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source, visit the website at www.masource.org.
Pepperdine University's Graziadio School of Business and Management
Douglass Gore, Director of Public Relations