Babson College’s 2013 Middle Market/Small Business M&A Survey

Babson College recently examined the conditions shaping mergers and acquisitions for small and middle market businesses. Professor Kevin J. Mulvaney directed the research with participation from M&A advisors, bankers, and other transaction professionals. The survey evaluated trends affecting buyers, sellers, financing, valuations, and transaction execution.

The 2013 Middle Market M&A Survey described a market that had improved considerably following the recession. However, economic uncertainty continued to influence transaction activity. For business owners considering a sale, several findings stood out.

First, the survey characterized the environment as a seller’s market for quality companies. Strong businesses could attract buyer interest, but preparation remained essential. The same conditions did not apply equally to underperforming companies. Buyers remained selective and placed greater emphasis on sustainable earnings, growth prospects, and business quality.

Deal execution also required patience. The survey reported that transactions commonly required six to nine months from serious negotiations through closing. Some respondents expected timelines to extend another month or two. Buyer due diligence contributed to these longer timelines. Buyers increasingly used experienced teams to examine financial performance, revenue trends, and future growth potential.

Another finding involved seller participation in smaller transaction. As company size decreased, buyers generally demanded greater seller assistance. That assistance could include earnouts, deferred consideration, employment, consulting, or other continuing involvement. At the time, deferred consideration averaged approximately 20 percent of the purchase price in surveyed transactions.

Financing conditions were also improving. The survey identified greater middle market lending availability and a rebound in SBA-guaranteed acquisition financing. Meanwhile, mezzanine debt yields had declined to approximately 12% – 14%. Historical averages had previously ranged from approximately 15% – 20%.

Taken as a whole, the 2013 Middle Market M&A Survey delivered a straightforward message for business owners. Favorable conditions alone did not guarantee a successful transaction. Quality companies still required careful preparation, realistic expectations, and experienced transaction guidance. Sellers also needed the information and responsiveness necessary to withstand increasingly thorough buyer due diligence.

For owners considering a future capital event, the survey supported planning well before entering the market. Preparation allowed sellers to evaluate alternatives and approach potential buyers from a stronger position.