By Brandon Mack
The M&A Source and the International Business Brokers Association (IBBA) recently published the results of their first quarter 2016 Market Pulse Report based on 370 survey respondents. In this first part of a three part series, we will examine three questions: Is it a buyer’s or seller’s market, how long does it take to sell a business, and valuation metrics.
Current business owners and those looking to buy a business are always wondering, is now the right time to buy or sell a business. The US market is fairly dynamic, so that often it is hard to determine when is the right time to buy or sell. In the last three months the survey showed that it has been a buyer’s market for deals under $1 million and a seller’s market for deals over $1 million.
How long will it take to buy or sell a business? In the same survey, it takes on average six and a half months from the initial offer to the close for businesses valued under $1 million (with almost 25% taking a year or more). For businesses valued over $1 million the average is nine months (with almost 30% taking a year or more). It takes on average three months between the Letter of Intent and closing for businesses of all sizes.
Are businesses being valued more or less today than in 2015? One metric for describing the value of a business is calculated using its owner’s cash flow or Seller’s Discretionary Earnings (SDE) (click here for definition) for businesses usually valued under $2 million. SDE and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) are about equally used to calculate the value of businesses between $2 and $5 million, with EBITDA the primary metric above $5 million.
The paid closing price for a business under $500,000 averaged 2.0 times its SDE; this has not changed in 2016. Businesses between $500,000 and $1 million have sold for an average of 2.8 times SDE; this has increased by 0.3 in 2016. Businesses between $1 million and $2 million have sold for an average of 3.0 times SDE; this has decreased in 2016 by 0.3. Businesses between $2 million and $5 million have sold for an average of 4.0 times EBITDA; this has not changed in 2016. Businesses between $5 million and $50 million have sold for an average of 5.5 times EBITDA; this has increased by 0.4 in 2016.
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