Potential tax increases are the primary driver behind sales of businesses valued at $5 million and above, highlighting how the threat of the fiscal cliff is taking a toll on the merger and acquisition market, according to a new report.

The third quarter Market Pulse Survey Report was produced by the International Business Brokers Association, M&A Source and Pepperdine University’s Graziadio School of Business and Management.

"Businesses over $5 million in value had more money to lose and were more keenly aware of the large potential tax increases coming in 2013. They decided to sell in 2012 in hopes of netting out more than they could after the new taxes take effect," said Chet Walden (Atlanta, GA), president of M&A Source.

The majority (57 per cent) of respondents anticipate that fewer sellers will go to market until they have better clarity on the future, while about a quarter (26 per cent) said they thought more sellers will attempt to close a deal before the new taxes take effect.

Meanwhile, retirement was the top reason for sales across all businesses valued under $5 million; the second most common reason was "burnout" and the third was "new opportunities."

"Baby boomers represent more than half of the business owners in the US and many are selling their businesses in order to have a comfortable retirement," Walden added. "For those businesses waiting to sell, I think it’s safe to assume that many are waiting to move 2009 off their three-year-trailing financial reports," said Dr John Paglia, an associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. "Most sellers had a poor financial performance in 2009, and moving past that may make their businesses more sellable."

Other key findings from the survey include:

• In the second quarter, cash at close accounted for roughly 50 per cent of deal financing across most sectors. For Q3, cash at close was at approximately 70-75 per cent across all but the $5 million-plus deals.

• Private equity purchases were "almost non-existent" until opportunities hit $5 million in value. In the most recent study, private equity dominated purchases of $5 million and above, at 68 per cent of deals closed. Of those, nearly all were add-on acquisitions with one private equity platform deal, the firms said.

• Local buyers within a 20 mile radius were the most common buyer group until deals surpassed $5 million in value. Less than 10 per cent of businesses in all sectors were sold to an international buyer.