Labor Issues, Deal Flow and Valuations in the Main Street and Lower Middle Market (enterprise values up to $2MM and from $2-50MM.)
The IBBA and M&A Source Market Pulse survey business advisers to these market segments on a quarterly basis and reports the national survey findings. Many of the most important issues for landscape company owners are also issues for small- to medium-sized businesses of all types across the country.
Labor issues topped the list on the survey, ahead of financial concerns for owners in Q3 2021. The labor issues continue to be a major concern for sellers and have driven many to sell due to labor shortages and employee turnover. The “war for talent” has been going on for years with no clear end in sight. While demand is high, the labor issues are limiting growth and creating risk in owner’s succession plans, causing some sellers to make their planned exit early than originally planned. Further, some owners who had planned to transition their businesses to senior internal managers are having difficulty with staffing at the management levels too. Owners wishing to transition their businesses to internal leaders or to achieve the best pricing for their business to a third party will be disappointed if their senior-level team is not in place to achieve either of those scenarios. While buyers are seeking acquisitions to expand their customer base, the survey results show that labor issues are a significant concern for them too.
Other top reasons given by sellers going to market with enterprise values of less than $2MM in Q3 2021, after labor, are cash flow not returning to pre-2019 levels, tax concerns (due to potential for capital gains taxes increases) and some sellers are entering the market because they’ve delivered strong financial performance and the market appears to be rewarding sellers with higher values now.)
Deal activity continues to be strong, driven by the economic recovery, the high levels of investment capital in the market to be deployed, and the favorable cost of debt. Multiples have returned to pre-pandemic levels in most market segments. New deal flow reported by the advisors responding to the survey showed strong new client engagements.
Seller market confidence is back to levels reported before the pandemic and is reflected in the final sale prices sellers received in Q3 2021. Sellers in the $5 million to $50 million sector realized, on average, a sale price that was 100% of the benchmark. Overall, in all sectors received 96% average of benchmark in the period.
Advisers expect valuations to increase with assertive positions taken by some private equity buyers as well as corporate buyers looking to add growth via acquisition with limits on labor stunting organic growth. Low corporate taxes and strong earnings recently have put many corporate buyers in a strong position to build through acquisition, with less risk than some other investments in growth.
Multiples are hitting records as the size of selling companies increases. Multiples typically increase as businesses get larger. Those larger entities will attract more interest from a wider geographic radius. Companies with an enterprise value of $5 million or more saw a strong valuation jump in Q3 2021, reaching a medium multiple of 6.8. That’s a record since this survey began in 2013.
While these valuations and deal flow metrics sound favorable for sellers now, it is important to note that these factors and market conditions can change easily and closing the opportunities that may be available now. We do find that sellers who are well positioned in terms of knowing what their exit plan options are, optimizing their business growth for profit and with succession plans prepared and actions to start them in place will be better positioned to achieve the highest value when the market is favorable to them. Even though retirement may be the biggest reason sellers go to market, the time for planning for an exit is several years before the targeted date for maximum value potential
If you would like to discuss your exit plan, let’s have a conversation. It’s rarely too early to think about these goals. We also help companies who want to grow by buying another company or who have decided it is time to sell now and want to get started or who want to prepare their company for sale. Have you bought a business and are having trouble integrating it? We can help with that too.
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