By Brandon Mack
The International Business Brokers Association (IBBA) and M&A Source have recently published their first quarter market research for 2020. The report is a statistical analysis of 416 respondents who answered this quarter’s 25 question survey. This is the final of a three-part series where I will examine the IBBA’s and M&A Source’s analysis of the market.
For businesses sold for under $500K, the most common industries in this range were restaurants at 27%, personal services at 22%, consumer goods at 15%, and healthcare at 10%. 85% of deals in this range had no formal exit planning. In the $500K to $1M range, the largest industries in this range were healthcare at 19%, consumer goods at 19%, and personal services at 15%. 73% of deals in this range did not have formal exit planning prior to engagement to sell. The most deals per industry in the $1M to $2M range are as follows: construction at 20%, personal services at 17%, restaurants at 10%, manufacturing at 10%, and healthcare at 10%. There was more exit planning in this range, as 29% met with an advisor. In the $2M to $5M range, 23% of the businesses sold in this range were in manufacturing, 14% were in wholesale, 14% were in construction, and 11% were in consumer goods. 53% of sellers had no exit formal planning. In the $5M to $50M range, 27% of the businesses sold in this range were in the healthcare industry, 20% were in wholesale, 20% were in business services, and 13% were in manufacturing. Exit planning was more common in this range, as 33% met with a broker before engagement.
In terms of seller financing, in the under $500K range, 12% of the price consisted of seller financing. In the $500K to $1M range, 13% was seller financing, in the $1M to $2M range 13% was, in the $2M to $5M range, 17% was, and in the $5M to $50M range, 8% was seller financing.
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) remained as the primary valuation metrics. Most of the transactions used SDE not including working capital multiples for business valued under $2M, SDE including working capital for $2M to $5M, and used EBITDA including working capital multiples for businesses valued between $5M and $50M. The inclusion of working capital in the purchase prices becomes more prevalent as the transaction size gets larger. For businesses valued under $500K, working capital was included only 15% of the time. For businesses $500K and $1M, 26% included working capital. For businesses $1M to $2M, 27% included working capital. For businesses $2M and $5M, 34% included working capital (which has returned to more normal levels than what was reported in the previous quarter). Lastly for businesses valued between $5M and $50M, 47% included working capital. When looking at comparable multiples, it is important to understand what basis the particular data base is using as some explicitly exclude working capital in the calculation, while others include it. In other words, one must be careful not to apply a multiple that excludes working capital to an offer that includes it, and vice versa.