By Brandon Mack
The International Business Brokers Association (IBBA) and M&A Source have recently published their first-quarter market research for 2021. The report is a statistical analysis of 301 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 analysis of the market.
Sellers do not always get their asking price. For businesses sold under $500K, they only got on average 86% of their asking price. Businesses sold between $500K and $1M received 92% of their asking price. Businesses sold between $1M and $2M received 95% of their asking price. The $2M-$5M range received an average of 92% of their asking price, and the $5M to $50M received 107% of their asking price. Overall, buyers have received a higher percentage of their asking price in 1Q21 compared to 4Q20. 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 profit growth while the company is for sale.
For businesses sold for under $500K, the most common industries in this range were personal services at 19%, restaurants at 15%, consumer goods at 14%, construction at 12%, and business services at 10%. 82% of deals in this range had no formal exit planning. In the $500K to $1M range, the largest industries in this range were business services at 15%, personal services at 12%, consumer goods at 12%, wholesale at 12%, and construction at 10%. 67% 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 17%, manufacturing at 15%, personal services at 15%, and consumer goods at 13%. 56% of businesses had not formal exit planning. In the $2M to $5M range, 24% of the businesses sold in this range were in manufacturing, 24% were in construction, and 20% were in consumer goods. 44% of sellers had met with an advisor to discuss exit planning. In the $5M to $50M range, 33% of the businesses sold in this range were in the manufacturing industry, 20% were in business services, and 13% were in construction. 43% of clients in this range met with an advisor about exit planning. One of the first steps to an exit plan is understanding the value of your business; starting two to three years before selling can give the Seller helpful insights to maximize their value.
In terms of seller financing, in the under $500K range, 13% of the price consisted of seller financing. In the $500K to $1M range, 10% was seller financing, in the $1M to $2M range, 11% was, in the $2M to $5M range 8% was, and in the $5M to $50M range 7% 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 businesses valued under $5M, and most of the transactions for businesses sold for over $5M but under $50M used EBITDA including working capital multiples. 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 14% of the time. For businesses $500K and $1M, 10% included working capital. For businesses $1M to $2M, 27% included working capital. For businesses $2M and $5M, 40% included working capital. Lastly, for businesses valued between $5M and $50M, 73% included working capital. When looking at comparable multiples, it is important to understand what basis the particular database uses 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.
