As 2020 winds down, many small businesses have had a year of ups and downs. In a recent national mergers and acquisitions poll conducted by the International Business Brokers Association and M&A Source, advisors reported that nearly half (48%) of their clients were operating at normal capacity. Another 35% are still at partial capacity while 6% remain temporarily closed.
So how has this affected M&A transactions? 85% of advisors indicated the pandemic has had a moderate or extremely negative impact on the M&A market. With such uncertainty, buyers have been hesitant to close on transactions. One obstacle has been the PPP loans; these loans have muddied the waters. In some situations, there is uncertainty whether or not the PPP loan will be forgiven. This results in some banks flat out refusing to support a transaction with an outstanding PPP loan.
There certainly is plenty of activity yet that does not translate to closings. Many people looking to buy a business are highly qualified professionals that have lost a job and have decided to explore buying a business. Oftentimes, this type of buyer is uneducated in the process and not a serious buyer.
So, when will the M&A market get back to normal? About 29% of advisors feel the market will return to normal in the second quarter of 2021, while 20% believe we’ll be waiting until 2022 or later. Some 11% of advisors are having great success and believe conditions have already recovered.
The businesses that are currently selling during the pandemic in the $1MM – $10MM range are construction/engineering (23%), manufacturing (18%), business services (16%) and wholesale distribution (15%).
Even with the uncertainty of the pandemic, the number one reason business owners are selling is retirement. Unfortunately, 50-60% of these owners have no formal exit plan in place. Advisors from around the country expect a small uptick in sellers going to market by the end of the year.
It has been determined that about 59% of the transactions that were on the market this past quarter involved businesses that are relatively pandemic-proof; these businesses stand out in the minds of buyers. Yet, if you have a business that has had a downturn in 2020 and you can show strong future business in 2021, you may not have an issue finding a buyer. Buyers realize the pandemic is an anomaly. We won’t see a year like this in quite a while.
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Minnesota based M&A firm that specializes in selling healthcare, business to business, transportation, manufacturing, distribution and IT companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming an intermediary, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.