According to the Market Pulse Report, recapitalization has shaped up to be the next biggest trend in the success of the small business market, replacing burnout as the number one reason that small businesses valued at $5-50MM are sold. Market Pulse Report is a quarterly report published by International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Markets Project. The quarterly report surveyed 278 business brokers and M&A advisors from 38 states in Q3 and came upon the results of recapitalization’s success in the increase of small business sales.
Owners of small businesses must either sell a minority (10-20%) or majority (70-80%) of their company to a private equity firm in order for recapitalization to occur. This arrangement allows businesses to grow and with the assistance of a firm, also decrease the level of risk taking. In Q3 2016 alone, private equity activity has increased among buyers from 39% (Q2) to 50% (Q3).
“The uptick in recapitalization activity could be an indicator that Lower Middle Market business owners are becoming savvier about their exit planning options and planning more in advance,” says Scott Bushkie the President of Cornerstone Business Services, Inc., and IBBA Chair. Craig Everett PhD of Pepperdine Private Capital Markets Project adds that, “Sharing financial responsibility with a private equity firm is a smart move for business owners who need strategic support or a cash infusion. When owners become ready to sell and retire, recapitalization can make their companies more attractive to buyers.”
As a result of obtaining a required level of value, recapitalization becomes a reality for small businesses. Deals must exceed $1 million in order for small business to break into the Lower Middle Market (which totals between $2-$5MM in value). Lower Middle Market value is what increases the chance of sellers to take advantage and strike recapitalization deals. However, small business that value at $0-$2MM are in the smallest market sector and stuck within the buyer’s market but the opportunity for seller leverage is improving.