The American Consumer

The American consumer is doing pretty well — or at least that was the case in from March to December 2022, when the Federal Reserve Board conducted its triennial Survey of Consumer Finances (SCF). The SCF surveyed about 6,500 households, and the results provide a comprehensive picture of the financial well-being of American households. This provides a meaningful insight into the broader economy because the United State is a consumer-driven economy, with some 70% of U.S. GDP is attributable to consumption.

The Health of the Consumer

The first insight from the most recent SCF is that the financial well-being of American households improved in 2022. Highlights of the 2022 SCF include:

• Median family wealth increased by 8.3% to $121,700 in 2022. This was the largest one-year increase in median family wealth since 2005. The increase in wealth was driven by rising asset values, particularly stock prices.

• The homeownership rate increased to 63.8% in 2022. This was the highest homeownership rate since 2008. The increase in homeownership was driven by low interest rates and rising home prices.

• The percentage of families with student loan debt increased to 22.3% in 2022. The median student loan debt balance was $30,000.

• The percentage of families with retirement savings increased to 70.3% in 2022. The median retirement savings balance was $75,200 for families with heads of household aged 55 to 64 and $259,200 for families with heads of household aged 65 and over.

Business Ownership

Another insight from the survey is that there is a strong correlation between business ownership and income (which, in turn, is aligned with net worth). As the below figure illustrates, among the top 10% of earners, nearly half own businesses. Because business owners, especially at the higher end, are more focused on building wealth than generating income, a similar figure comparing business ownership to net worth percentiles is likely to be even more stark.

Source: Aladangady, Aditya, Jesse Bricker, Andrew C. Chang, Sarena Goodman, Jacob Krimmel, Kevin B. Moore, Sarah Reber, Alice Henriques Volz, and Richard A. Windle (2023). Changes in U.S. Family Finances from 2019 to 2022: Evidence from the Survey of Consumer Finances. Washington: Board of Governors of the Federal Reserve System, October, https://doi.org/10.17016/8799

Net Worth

The SCF also provides a benchmark against which individuals and households may measure their net worth. The below chart breaks down the median net worth for various percentiles, meaning that of the roughly 1,625 households with the lowest net worth, that middle household, 813 up from the bottom, has about $3,470 in net worth. In case you're curious, households in the 99th percentile have a net worth in excess of $13 million. Taking inflation into account, net worth is up significantly in all percentiles from the previous survey in 2019, which higher percentage increases in the lower net worth percentiles.

Percentile	Net Worth
Below 25%	$ 3,470
25-50	93,400
50-75	356,900
75-90	1,036,300
90-100	3,795,000

Source: 2022 SCF

Further Information:

-U.S. Federal Reserve Survey of Consumer Finances

-The role of the U.S. consumer in the economy

-Additional information on net worth percentiles

The Impact of Rising Interest Rates on M&A Activity

The recent rise in interest rates has had a significant impact on M&A activity over the past 12 months. The higher cost of borrowing has made it more expensive for companies to finance acquisitions, and this has led to a decline in deal volume.

Source: Board of Governors of the Federal Reserve System, accessed via

fred.stlouisfed.org on August 10, 2023. Of note, although the recent rise in rates brings them back to historical norms, it represents a break from over two decades of declining rates followed by a period where rates were near zero.

In a survey undertaken by Pepperdine University Graziadio Business School earlier this year, investment bankers reported decreases in deal flow, leverage and deal multiples,

and worsened general business conditions. (See page 38 of the report.)

According to data from Refinitiv, the global M&A deal volume in the first quarter of 2023 was down 20% from the same period in 2022. The decline was particularly pronounced in the United States, where deal volume fell by 30%.

Source: Bain Private Equity Mid-Year Report (2023)

There are a number of reasons why the rise in interest rates has had a negative impact on M&A activity. First, the higher cost of borrowing makes it more expensive for companies to finance acquisitions. This is especially true for companies that are using debt to finance their deals.

Second, the rise in interest rates has led to a decline in the valuation of companies. This is because the higher cost of borrowing makes it less attractive for investors to buy companies at high valuations.

Third, the rise in interest rates has created uncertainty in the market. This uncertainty has made it more difficult for companies to assess the value of potential acquisition targets.

The rise in interest rates is likely to continue to have a negative impact on M&A activity in the coming months, particularly given the presence valuation gaps between what business owners expect to sell their companies for and what buyers are willing to pay.

Additional Information:

• Pepperdine Private Capital Markets Report (2023)

• Bain Private Equity Mid-Year Report (2023)

The Right Time to Sell Your Business

By Deven Desai

You may be thinking: Why should I sell my company when I have grown and built it from the ground up with years or decades of dedication and intense effort? The fact is that if money is the primary object and you have a business that is generating a lot of cash, you'd probably be better off not selling. That said, there are certainly situations and changes in life circumstances that present good reasons to sell your business. Here are a few of them:

• Retirement — At a certain point in life, you may think about retirement and taking on a relaxing lifestyle. In order to retire comfortably, you might put your company up for sale to earn a large chunk of cash at once that you can use to relocate or fund other retirement activities like travel. In addition, the release of stress and responsibility from running a business would allow you to truly enjoy the rest of your life. Spending time with family and friends or pursuing passions can be even more rewarding than running a business.

• New Opportunity — As the world is constantly changing and there are so many new problems arising, you may realize that you want to pursue a solution to a different issue. Instead of completely changing your current company, you may decide to sell your current business and start a new one from the ground up. Some entrepreneurs enjoy moving from business to business and the excitement of pursuing different ideas instead of sticking to one company. Building and selling business after business can be quite profitable as well.

• De-risking — There are high risks that come with running a business because of the ever changing political, economic, and cultural climates. An economic crash or change in industry regulation could seriously impact a business and cause it to go bankrupt in the worst case scenario. Consequently, if you are averse to risk, you may decide to sell your business when it is strong and still growing to exit and earn a solid valuation. You can then invest your profits in mutual funds to further de-risk and watch your money grow over time without the relative uncertainty that comes with running a business.

• Industry Strength — The industry your business operates in might be attracting a lot of M&A activity with high EBITDA multiples. For example, during the depths of the pandemic, healthcare software and telehealth M&A activity was quite strong because of the focus on more contactless options to receive healthcare. As a result, many businesses within the healthcare software industry had good exit opportunities because they could command high valuations based solely on industry strength. Being in an industry that is booming due to current events and changing cultural/societal trends can influence you to put your business up for sale and try to maximize their profits while the timing is right.

• Burnout — Running a business can be an extremely draining process, both mentally and physically. You may decide to sell your businesses to relieve yourself of stress, anxiety, fear, and other negative emotions. Stepping outside of an operational role and enjoying the big payout from selling a business allows you to enjoy life and take some time before finding another endeavor to pursue.

For perspective, the below chart shows the reasons why owners of business worth $5 - $50 million have decided to sell. (The information is pre-pandemic).

Everett, Pepperdine University — 2020 Private Capital Markets Report, page 80

While there are many reasons to consider selling a business, you should also be mindful of selling a business too soon or for the wrong reasons. You should also not sell your business too soon to earn some money when you believe in the long term growth potential of your company; in an extreme example, Snapchat’s Evan Spiegel refused a $3 billion dollar from Facebook because he believed in his company, and this paid off when Snapchat later filed for an IPO. In addition, if you enjoy running your business and being your own boss, you should continue to run it.

See also:

• Pepperdine University — 2020 Private Capital Markets Report (See page 80 for Reasons for Seller to go to Market.)