By Reizchel Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their third-quarter market research for 2021. The report is a statistical analysis of 303 respondents who answered this quarter’s 25 question survey. This is the last of a three-part series where I will examine the IBBA’s and M&A Source’s market analysis.
Sellers do not always get their asking price. Overall, sellers received an average of 93% of their asking price. For businesses sold for under $500K, the average was 87% of their asking price. For businesses sold in the $500K to $1M range, sellers received an average of 96% of their asking price. For businesses sold in the $1M to $2M range, sellers received an average of 91% of their asking price. For businesses sold in the $2M to $5M range, sellers received an average of 102% of their asking price. And for businesses sold in the $5M to $50M range, sellers received an average of 106% of their asking price. In general, buyers received a higher percentage of their asking price in 3Q2021 compared to 2Q2021. At Murphy Carolinas, our average runs about 96% (before earnouts) – pricing the business correctly on the front-end, with the ability to back-up the price with data, greatly improves this metric – as does focusing on revenue and growth while the company is for sale.
For businesses sold for under $500K, the most common industries in this range were personal services at 20%, consumer goods and retail at 17%, business services at 11%, restaurants at 10%. In the $500K to $1M range, the most common industries were construction and engineering at 19%, business services at 17%, healthcare and biotechnology at 13%, and personal services at 13%. The most common industries in the $1M to $2M range were business services at 20%, construction and engineering at 18%, wholesale and distribution at 13%, consumer goods and retail at 10%, manufacturing at 10%. In the $2M to $5M range, 26% of the businesses sold were in construction, 24% were in manufacturing, and 12% were in consumer goods & retail. In the $5M to $50M range, 39% of the businesses sold were in manufacturing, 22% were in wholesale & distribution, and 22% were in healthcare & biotechnology.
In terms of seller financing and earnouts, in the under $500K, 10% consisted of seller financing and 2% was earnout. In the $500K to $1M range, 8% consisted of seller financing and 1% was earnout. In the $1M to $2M range, 13% consisted of seller financing and 1% was earnout. In the $2M to $5M range, 9% consisted of seller financing and 0% was earnout. And in the $5M to $50M range, 6% consisted of seller financing and 1% was earnout.
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) remained as the primary valuation metrics/multiple types. Most of the transactions under $5M in value used SDE Not Including Working Capital multiples for the following businesses: 74% for under $500K, 60% in the $500K to $1M range, 53% in the $1M to $2M range, and 38% in the $2M to $5M range. Thus, SDE Including Working Capital in the under $500K was 17%, 25% in the $500 to $1M range, and 18% in the $1M to $2M range. 20% in the $1M to $2M range, 18% in the $2M to $5M range, and 65% in the $5M to $50M range used EBITDA Including Working Capital. The $5M to $50M switches EBITDA and Working Capital Included as the most common metrics. Specifically, SDE (vs. EBITDA) was used 91% of the time for the under $500K, 85% of the time for the $500 to $1M range, 71% for the $1M to $2M range, 83% for the $2M to $5M range, and 18% for $5M to $50M range. Multiples excluding working capital (vs. including it) were used 81% of the time for the under $500K, 73% for $500 to $1M range, 62% for the $1M to $2M range, 67% for the $2M to $5M range, and only 26% for the $5M to $50M range.
In terms of expectations for business valuation multiples in the next three months, most multiples are expected to stay the same for the following ranges: 78% of respondents for deals valued under $500K, 80% of respondents for deals valued in the $500K to $1M range, 77% of respondents for deals valued in the $1M to $2M range, 67% of respondents for deals valued in the $2M to $5M range, and lastly, 66% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to increase.