Business brokers expect a healthy M&A market in 2020 with 55% of advisors predicting the volume of deals (under $50 million) will increase in the next 12 months according to the Q4 2019 Market Pulse Report published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Market Project.

While valuations for small and medium businesses held strong in 2019, remaining at or above market peaks, advisors expect that businesses will take longer to sell in 2020 and that closing deals will become more difficult. Business brokers representing small businesses valued at less than $500,000 point to financing challenges as an obstacle to getting deals done.

“Small businesses valued at less than $500,000 have become harder to sell in the last few years. Advisors have consistently singled out that sector as a buyer’s market, with more supply than buyer demand. Financing is also an issue as individual buyers struggle to line up the cash and lending support necessary to complete these deals,” said Barry Berkowitz, principal, Berkowitz Acquisitions.

The average time to sell a small business has risen to 8.6 months, a 133% increase from 6.4 months in 2013. Of that, roughly 60 to 120 days are spent in due diligence and execution after there is a signed letter of intent.

“As valuations rise, due diligence increases,” said Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. “Buyers are paying a premium for lower middle market deals, so deal teams are spending more time verifying seller data and validating their investment recommendations.”

The Market Pulse report also found that seller-market sentiment dipped slightly in the lower middle market at the end of 2019, but advisors still indicate that sellers have a strong advantage across all but the smallest business sector. Excluding businesses valued at less than $500,000 advisors have not rated any sector as a buyer’s market since Q3 2017.