When we launched ChannelE2E in September 2015, we noted that M&A activity -- across all small businesses, including IT service providers -- would likely increase each year through at least 2022 before leveling off a bit.
Among the driving factors for those anticipated M&A deals: Small business owners in the Baby Boomer generation (born between 1946 and 1964, roughly) are racing to retire, and need to unlock net worth from the companies they created.
A new BizBuySell report affirms our Baby Boomer Exit/M&A thesis. A total of 5,383 U.S. small businesses were sold in the first two quarters of 2018. M&A activity is on track to exceed last year's record high (9,919 transactions). The median revenue of businesses sold was up 7.4 percent from last year to $526,048, while the median cash flow grew 3.4 percent to $120,000.
M&A: Higher Small Business Price Tags
Amid those improving business financials, business owners are demanding somewhat higher price tags for their companies. Asking prices rose 4 percent in Q2 2018 vs. the second quarter of 2017, and the median sales price jumped 4.4 percent.
Buyers are also doing well, the authors say, because the businesses they're buying typically have firmer financial footing beneath them.
SMB business optimism could drive even more deal activity. Indeed, BizBuySell points to the National Federation of Independent Business (NFIB), whose small-business optimism index rose 3 points to 107.8 this past May, the second-highest level in the index’s 45-year history.
Baby Boomers: The Two-Year Window
Despite the recent exit activity, Baby Boomers still make up the majority of small business owners at 53 percent. Two out of three have owned more than one business, and 68 percent have owned their current business for more than 10 years.
What’s interesting for the market, and what will likely drive M&A activity for the foreseeable future, is that nearly 60 percent of those same Baby Boomers plan to sell their business within the next two years or less.
New Owners: Diversity Grows
With new buyers comes a more diverse set of owners. Incoming buyers are less likely to identify as caucasian (65 percent versus 71 percent), the majority are under 50 years old, and despite both groups leaning tending to be Republican, buyers are 25 percent more likely to be Democrats.
A third of buyers are non-natural born US citizens, and 64 percent are first-generation immigrants, while another 16 percent are second-generation. Currently, just 48 percent of owners are first generation and 10 percent second generation.
Women still make up a minority of small business owners at 22 percent, but those owners are trending younger. Twice the percentage of female owners are in their 20s as compared to men, while twice the percentage of female business owners identify as African American compared to men.
Overall, the authors say this rising financial performance coupled with a growth in sellers ready to exit the market could keep pushing M&A activity for the rest of 2018.
In the IT service provider sector, we expect the M&A wave to continue growing as private equity firms continue plowing money into IT service providers. But the trend won't last forever. As we've warned, we do worry about so-called "short runways" in the PE market...
Additional insights from Joe Panettieri.