2024 Year in Review - Small Business M&A

This Year in Small Business M&A

Despite heavy temptation, this article includes zero usage of AI (Editor's note* except for the cover image).

In calendar year 2024, we saw slow but consistent deal cycles, along with macroeconomic and capital market headwinds. Especially leading up to the November election, there was a great deal of economic uncertainty which caused business owners to be hesitant to make significant changes and caused acquirers to be exceedingly thorough and methodical in the buying process. Despite headwinds and uncertainty, we saw the resiliency of small business on display, spearheaded by acquirers with clear vision and banks who were eager to issue debt to strong founder-led and legacy businesses.

As a boutique investment bank working on roughly a dozen transactions a year, our sample size is small and much of the following data is merely anecdotal. Nonetheless, here are some data points we believe are indicative of the current lower middle market M&A activity.

• Of our existing universe of acquirers as of end of 2023, over 70% of those acquirers remained active (searching for deals) in 2024

• Our total universe of acquirers grew by roughly 40% in 2024

  • Of those, the majority were new market entrants (mostly search funds)

• Inbound seller leads per month has remained constant, despite overall network growth, indicating a slight reduction in the number of sellers entering the market from 2023

• EBITDA multiples have:

  • Compressed slightly in service businesses
  • Expanded slightly in industrial businesses
  • Expanded slightly in multi-location retail businesses
  • Likely due to interest rates recently beginning to drop / cost of capital going down from ‘23 levels and being expected to continue to fall

• Lenders have become more aggressive and competitive

  • Seeing some SBA loans at prime floating rates
  • Competition from alternative guarantee programs like SSBCI
  • Though high rates have created headwinds, lender competition has helped offset this

• Equity financing is still hard to access

  • Risk-free rates relatively high and hard to compete against
  • Sponsors having difficulty raising outside capital, even for solid acquisition projects
  • Groups / individuals interested in taking LP positions may see opportunity / less competition in this space in early ‘25

With all of that said, my expectation for the 2025 small business M&A market is for demand to expand slightly, supply to shrink slightly, access to debt capital to continue to improve, and ultimately for EBITDA multiples to move slightly up.

Many business owners will be looking at depressed earnings in ‘23 & ‘24 as compared to ‘21 & ‘22. When deciding on the right time to sell, many of those owners may see ‘25 as the time to get earnings back on track in preparation for a ‘26 or ‘27 exit. To those founders and operators, I would say, engage the right investment bank to help you prepare for the sale process the right way. Massive gains in market value can be made by preparing correctly, without ever influencing a dollar in earnings.

Whether there were headwinds, tailwinds, high rates or low rates, in 2024 we got to help entrepreneurs preserve the value of small businesses through good transactions. We also got to make some incredible friends and build fulfilling relationships while doing it.

One great moment from 2024 came early on in a process with a steel fabrication client. We were discussing pros and cons of three different buyers / offers. The client couldn’t figure out which buyer they liked better. The CFO/Partner said,

This had come after a year-long process of the client trying to sell the business through a business broker. Just to feel the genuine excitement and to see how that client felt respected by all parties involved, especially after what they’d experienced previously, was among the highlights of the year.