Will a talent shortage drive business valuation demand?
The tightening labor market could be good news for deal activity and for the business valuation professionals who assist buyers and sellers. It also highlights for business advisors a timely topic to discuss with business owners: the importance of intangible assets like talent for the value of the business.
A recent survey of business brokers and advisors found that 55 percent of them expect the shrinking labor market will lead more business owners to pursue acquisitions for their expansions. As for sellers’ motivations, retirement continues to be the top reason business owners look to sell, followed by burnout, according to the Q3 2017 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Market Project.
Talent acquisition ‘key part of strategy’
David Ryan, an advisor with Upton Financial Group in California, said in the report that talent scarcity is driving M&A activity. “For businesses looking to grow, acquisitions present an efficient way to land a trained and established labor force,” he said. “When we talk to corporate M&A teams, we increasingly hear that talent acquisition is a key part of their strategy.”
In addition, organic growth remains a challenge for many businesses, given the slow growth of the U.S. economy, so some firms are looking to grow through add-on businesses, the Market Pulse report said. It reported an uptick in deal activity since Q2 by private equity buyers, especially among deals valued between $1 million and $2 million.
Manufacturing and construction/engineering industries are among the hottest industries for deal making, said the report, which included responses from more than 300 business brokers and M&A advisors.
The recent drivers of deals make it vital for business advisors to remind owners that highly trained staff and managers can boost the value of their companies. Intellectual property and the collective goodwill of a business are additional intangibles that can affect the value of the company.
Business advisors can help owners of businesses earn top multiples when they go to sell by teaching them how to treat the business like an investment. Treating a business like an investment includes attracting and retaining a top-notch staff and managers. Many owners put off planning for succession, delaying or foregoing the development of another top manager to step in once the owner is gone. This kind of one-person show can hurt the chances of selling the business when it comes time to retire or in the event of a sudden illness or death of an owner. Or it can reduce the value assigned to such intangible assets.
Deal outlook
Despite recent M&A drivers, the Market Pulse survey found that business advisors were not expecting business valuations to expand during the fourth quarter, due to a shortage of what is considered high-quality acquisition targets in the lower middle market. They do expect, however, a modest increase in new listings at year end, so that could mean more business for valuation professionals in the coming year.
Based on the survey data, deal multiples (both multiples based on Earnings Before Interest, Taxes, Depreciation and Amortization and multiples based on Sellers Discretionary Earnings) declined from a year ago in every size market. On a positive note for both sides of the transaction, the time to close a deal is shorter than it was a year ago for most deal sizes (6 months for business values below $500,000, vs. 7 months a year ago, for example).
Additional Resources
Practice Aid: Why Do Business Owners Need a Valuation?
Webinar: Teaching Your Clients to Treat Their Business Like an Investment
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