Important market items to recognize going into 2025
Yes, I’m that old and have been here before (a few times). Many know that I travel the country speaking at broker events in states from east to west, and what I’ve found this year shouldn’t surprise you. Without being political, every election year seems to have certain effects on the acquisition markets across the country. I’ve lived through too many to count and this year was no different, but the future might be.
Our firm pre-qualified more clients in 2024 than any year in our past and you would think that would be a positive step, but we closed fewer transactions than in previous years. We experienced a much lower application submission rate which means either buyers missed opportunities by hesitating, or they had bigger concerns about the future direction of the national economy. Just the talk of higher taxes, more governmental spending and less personal excess income can cause some clients to re-evaluate opportunities and second guess a business purchase.
Truth is that every buyer has a family member or friend who knows more than any industry expert. This “family friend” had plenty to hang their hat on and could easily build a case on why investing in small business was a bad decision during 2024 (or at any time for that matter). We found that many buyers missed opportunities since there were less business listings available and it’s been more of a sellers’ market with multiple buyer’s offers submitted simultaneously. Bidding wars on certain businesses and industries brought higher multiples as interested parties were competing for offer acceptance, and don’t forget the interest rates.
A 10% interest rate for a $3 million dollar goodwill transaction which includes no collateral to speak of should be considered a great rate (in my opinion). Many buyers remember that just a few short years ago the cost of funds was around 6% and they just cannot come to terms with the current 10% rate. This causes additional time delays and hesitation for the less experienced buyer that is focused solely on interest rates and not on potential future revenue income. One client demanded a minimum of 5 lender considerations before agreeing to move forward with any one of them. The biggest concern with this mentality is that there are so many other important factors to consider and now the best overall structure of the transaction has just become secondary. What most clients fail to consider is that this level of lender “shopping” usually comes at an expense to the transaction. By only utilizing interest rates as lending criteria, most transactions experience higher levels of structure changes and expense during underwriting and closing. Higher interest rates typically demand higher levels of collateral along with larger seller financing portions.
Here’s what we see changing as we move into next year. We believe interest rates will continue to come down and more importantly, we see business listings greatly increase for every broker office. Many of our higher volume broker offices shared that their staff were performing more valuations but signing less businesses than any year previous. One broker office (in a vertical industry) that typically signs between 60 and 75% of their performed valuations, only brought about 22% to market this year as listings and they expect those not signing their contracts in 2024 to resurface and execute them in 2025.
Broker optimism is at an all-time high as the market is heating up nationwide. Most brokers we work with are currently reaching out to all previous potential sellers that have not sold or listed and are reestablishing a path to exit for them. Savy buyers are now becoming more flexible as they understand they need to move quickly on better business listings.
Overall, we see and hear nothing but positive news from lenders, brokers and clients right now, so it’s time to buckle down, buckle up for 2025 and let’s get started!
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