Small biz buyout activity booms, driving up acquisition prices

For many small businesses, the easiest thing to sell right now might be the business itself.

Buyout activity is booming, and the prices being paid are at or near records for companies up to $50 million in value, brokers say. Many small-business owners are fielding more cold calls asking if their companies are for sale, and owners who do put their businesses on the market are often receiving multiple bids.

"I've been doing this for 20 years, and I can say that if this isn't the top market, it's the top one or two in recent years," said Scott Bushkie, principal at Cornerstone Business Services, a mergers-and-acquisition firm based in Wisconsin that works with lower middle market companies. "You've really got the stars all aligned."

Among those stars: Companies that want to grow may see an acquisition as the easiest way to get trained workers amid a tight labor market. Lower taxes and lighter regulation have improved sentiment. On top of all that is a generation of Baby Boomers looking to sell and retire.

The market is so hot that Bushkie has heard some prospective buyers say they're interested in a purchase, but they're too busy at the moment with other acquisitions.

The jump in activity has pushed prices up. One traditional way that brokers set the price for a company is to look at its earnings before interest payments, taxes, depreciation costs and amortization, which is called EBITDA.

In the first three months of the year, the typical purchase price was 6.1 times EBITDA for a company valued between $5 million and $50 million. That's up by more than a third from four years earlier, according to surveys from the International Business Brokers Association, M&A Source and the Pepperdine Private Capital Markets Project.

In the insurance industry, prices have neared 12 times EBITDA, said Mike Shea, president and CEO of Shea Barclay Group. His company has made three acquisitions in the last 16 months.

"It's really unprecedented, not only the volume of deals, but the competition for deals," Shea said. "We're excited to be on the buy side, but we also take into consideration that it almost reminds you of the housing market: Are we at the peak?"

Still, Shea and brokers across industries say they don't see signs of the market cooling. Even recent increases in interest rates, which would seem to be a deterrent, haven't dented deal activity. If anything, they may have pushed some buyers to make their purchases before rates moved even higher.

"You would think there would be a tipping point" from higher rates, said Craig Everett, finance professor at Pepperdine Graziadio Business School. "With the tax and regulation environment a little bit more business-friendly now, maybe that's delayed the change in valuations. But it seems like everyone thought that the valuations would be going down by now, and it hasn't."

Small business owners are selling to people like Tom Szold, who had been working in public affairs but always wanted to run a business. He joined with his brother and a friend in May to buy Precision Safe Sidewalks, which helps city governments and other customers identify where their trip hazards are and how to fix them.

He got help through the process from an attorney and the selling company's broker, as well as a Small Business Administration loan provider. One of the biggest lessons: "Everything takes longer than you think," he said. "Estimate how much time you think it's going to take and add to it."

Some other considerations small business owners should keep in mind:

— If there's a time to sell, this may be it.

"A lot of times the owners wait a little too long to sell," said Everett. "They wait until the business starts to stagnate, and then they think of getting out." But owners will always get a better price when their business is growing.

— Selling doesn't have to mean leaving.

Jeff Kaplan, the founder of cloud-service provider Breakthrough Technology Group, had long declined calls from potential acquirers as he focused on building the business. But he recently decided he wanted a more national scope, so he sold a majority stake to Abry Partners, a private-equity firm, in December. A few months later, Breakthrough Technology Group merged with another company owned by Abry, NexusTek.

Kaplan, now chief revenue and strategy officer at NexusTek, says he doesn't miss being the owner of his own business, in part because the company now has roughly 10 times more employees.

"I'm excited because now we have more capital, more access, more people," he said, "and we can really tactically execute on the vision" to become a national leader in what has been a regionalized industry.

— Start thinking about it early.

Even if you don't want to sell now, have a plan for when you do. Opportunities can come suddenly. So can an illness or other changes that could push up the timetable for a sale.

Kaplan suggests paying attention to your bookkeeping, even though it's a chore that's tempting to put off.

"What will happen is there will be a point in time where you might get a call or you might be interested," he said. "And if you do all that work a year or two in advance, it makes it a lot easier."