Small Business Economic Trends and Their Impact on Mergers and Acquisitions in 2025
As we approach 2025, the NFIB’s November 2024 Small Business Economic Trends (SBET) report provides essential insights into the state of small businesses and their outlook for the future. With an 8-point rise in the Optimism Index to 101.7—the highest since June 2021—small businesses are signaling a positive shift. This newfound optimism is underpinned by significant economic and policy changes that directly impact mergers and acquisitions (M&A), particularly in the small business sector.
Key Takeaways from the SBET Report
Improved Economic Confidence: Following 34 months of below-average optimism, the current index reflects a rebound driven by favorable economic policies and market conditions. Business owners’ expectations for higher sales increased by 18 points, suggesting stronger revenue streams that can boost valuations in potential M&A deals.
Capital Investment Surge: Plans for capital outlays climbed to their highest levels since January 2022, with 28% of business owners planning investments. Investments in equipment and facility upgrades indicate a focus on long-term growth and operational efficiency, making these businesses more attractive acquisition targets.
Labor Market Dynamics: Despite ongoing challenges in finding qualified applicants, 18% of small business owners plan to create new jobs in the next three months. Strong hiring plans can be a marker of growth, which is appealing to potential buyers in the M&A market.
Rising Earnings and Sales Trends: Earnings trends, though still negative, showed marked improvement. Similarly, sales expectations are the highest since February 2020, underscoring a stronger revenue outlook. These factors enhance the perceived stability and growth potential of small businesses, essential metrics for acquirers.
Cost Pressures and Inflation: Inflation remains a concern, with 20% of owners citing it as their top problem. However, businesses planning price hikes (28%) and focusing on efficiency gains are demonstrating resilience.
Mergers and Acquisitions Outlook for 2025
1. Market Opportunities
Stronger Valuations: Improved earnings and capital investments enhance the valuation of small businesses. Buyers are likely to see opportunities for acquiring companies with solid growth trajectories and scalable operations.
2. Challenges in Deal Structuring
Higher Interest Rates: With borrowing costs for small businesses averaging 8.8%, potential buyers may face tighter financing conditions. This could shift deal structures toward more earnouts or seller financing options.
Economic Uncertainty: Despite declining uncertainty levels post-election, global economic factors and regulatory changes may influence M&A timelines and valuations.
3. Strategic Moves for Sellers
Preparation for Exit: Small business owners considering an exit should focus on optimizing operations, managing debt levels, and showcasing growth potential to attract favorable acquisition offers.
Leveraging Optimism: The rise in optimism is an opportune moment for sellers to position their businesses as forward-looking and adaptable to market demands.
4. Implications for Buyers
Focus on Value Creation: Buyers must identify synergies that can be realized post-acquisition, such as technology integration, market expansion, or cost efficiencies.
Sector Analysis: Prioritize industries with robust growth potential, such as those investing heavily in capital improvements and employee expansion.
Conclusion
The SBET report paints a picture of resilience and opportunity in the small business landscape, setting the stage for a dynamic M&A environment in 2025. For small business owners and potential buyers, understanding these trends is critical for navigating the complexities of M&A transactions. By leveraging the insights from this report, stakeholders can position themselves to capitalize on emerging opportunities and achieve mutually beneficial outcomes in the year ahead.