By: Reizchel Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their second-quarter market research for 2023. The report is a statistical analysis of 413 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.
Asking Price vs. Actual Sale Price:
Sellers do not always get their asking price. Overall, sellers received an average of 92% of their asking price. For businesses sold in the $500K to $1M range, it was 94%. For businesses sold in the $1M to $2M range, it was 94%. For businesses sold in the $2M to $5M range, it was 93%. And for businesses sold in the $5M to $50M range, sellers received an average of 105% of their asking price. In general, buyers received a similar percentage of their asking price in 2Q2023 compared to 1Q2023. At Murphy Carolinas, our long-term average is running 97% (not including 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.
Common Industries for Business Sales Across Price Ranges:
For businesses sold in the $500K to $1M range, the most common industries were 16% construction & engineering, 15% personal services, 11% consumer goods and retail, and 10% restaurants. The most common industries in the $1M to $2M range were 19% construction & engineering, 13% restaurants, 10% consumer goods & retail, and 10% personal services. The most common industries in the $2M to $5M range were 23% manufacturing, 21% construction & engineering, and 14% consumer goods & retail. And in the $5M to $50M range, the most common industries were 39% construction & engineering, 13% consumer goods & retail, and 13% business services.
Seller Financing and Earnouts in Business Sales:
In terms of seller financing and earnout, in the $500K to $1M range, 11% consisted of seller financing and 1% was earnout. In the $1M to $2M range, 9% consisted of seller financing and 1% was earnout. In the $2M to $5M range, 9% consisted of seller financing and 2% was earnout.
In the $5M to $50M range, 9% consisted of seller financing and 3% was earnout.
Primary Valuation Metrics and Multiples Used in Business Sales:
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) remained the primary valuation metrics/multiple types. Specifically, SDE (vs. EBITDA) was used 86% of the time for the $500 to $1M range, 83% for the $1M to $2M range, 51% for the $2M to $5M range, and 22% for $5M to $50M range (which is historically where the shift occurs).
Is Net Working Capital Included in the Price?
Multiples excluding working capital (vs. including it) were used 85% of the time for the $500 to $1M range, 69% for the $1M to $2M range, 54% for the $2M to $5M range, but only 49% for the $5M to $50M range (which is historically where the shift occurs).
Expectations for Business Valuation Multiples in the Next Three Months:
In terms of expectations for business valuation multiples in the next three months, most multiples are expected to increase for the following ranges: 48% of respondents for deals valued in the $500K to $1M range, and 47% of respondents for deals valued in the $1M to $2M range. In the following ranges are expected to stay the same: 54% of respondents for deals valued in the $2M to $5M range, and 63% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to increase.