By Brandon Mack
The International Business Brokers Association (IBBA) and M&A Source just published their first quarter market research for 2017. The report is a statistical analysis of 315 respondents who answered a 25-question survey. In a three-part series, I will examine the IBBA’s and M&A Source’s analysis of the market.
The respondents were asked about current problems in the market. For example, 47% agreed that rising interest rates will cause a decrease in valuations, while 26% disagreed. 40% agreed and 38% disagreed that there will be a decrease in the buyer pool because of the rising interest rates; the other 22% said there will be no change. Lastly, 72% of the respondents also answered that failure of the Republicans to pass a new healthcare plan will not change the current market.
The market continues to be a buyer’s market for businesses valued under $1M and a seller’s market for businesses over $1M. For businesses valued under $500K, 66% of the respondents answered it was a buyer’s market. Similarly, 55% responded it was a buyer’s market for business valued between $500K and $1M. 57% answered it was a seller’s market for the $1M to $2M range, and 68% answered it was a seller’s market for the $2M to $5M range.
This quarter, for businesses sold for under $500K, the median number of months from listing to close has been seven months, and for businesses sold between $500K and $2M, the median number is six months. Businesses sold between $2M and $5M take longer to sell, the median number of months this quarter is eleven months.
The Seller’s Discretionary Earnings (SDE) multiple paid has increased across the board since Q1 of 2016. This quarter, the SDE multiple for businesses sold under $500K was 2.3 compared to last year’s 2.0. In the $500K to $1M range, SDE multiple has stayed the same at 2.8. In the $1M to $2M range, the SDE multiple has increased from 3.0 last year to 3.3 this year. Finally, in the $2M to $5M range, the SDE multiple has risen from 3.4 in Q1 2016 to 3.5 in Q1 2017. It should be noted that the multiple can vary widely within a value range based on the industry, market, and company specifics.
In Q1 of 2017, the large majority of businesses sold under $5M have used SDE not including working capital as the multiple type. For example, for businesses sold under $500K 81% used the SDE not including working capital. For business sold between $500K and $1M, 68% used the SDE not including working capital. In the $1M to $2M range, 62% used SDE not including working capital. Finally, in the $2M to $5M range, 53% used the SDE not including working capital and 29% used EBITDA including working capital as the multiple type.