By Brandon Mack
The International Business Brokers Association (IBBA) and M&A Source have recently published their third quarter market research for 2019. The report is a statistical analysis of 236 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 personal services at 31%, restaurants at 17%, and consumer goods at 15%. 83% of deals in this range had no formal exit planning.
In the $500K to $1M range, the largest industries in this range were wholesale at 18%, personal services at 18%, and manufacturing at 11%. Only 16% had formal exit planning prior to engaging with the broker.
The most deals per industry in the $1M to $2M range are as follows: personal services at 24%, business services at 15%, construction at 12%, and wholesale at 12%. Surprisingly in this range, still 72% of sellers had no exit planning.
In the $2M to $5M range, 24% of the business sold in this range were personal services, 18% were health care, 18% were manufacturing, 18% were construction, and 12% were business services. Still, 67% of sellers had no exit planning.
In the $5M to $50M range, 38% of the business sold in this range were in the manufacturing industry, 19% were in the construction industry, 13% were in the information technology industry, and 13% were in the health care industry. Most sellers (56%), had an exit strategy in this range.
In terms of seller financing, in the under $500K range, 11% of the price consisted of seller financing. In the $500K to $1M range, 14% was, in the $1M to $2M range 6% was, and in the $2M to $5M range, 13% 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 14% of the time. For businesses $500K and $1M, 23% included working capital. For businesses $1M to $2M, 27% included working capital. For businesses $2M and $5M, 59% included working capital (which is a significant shift from prior periods where the percentage has been closer to 40% – we will revisit this next quarter to see if this is a trend or a blip. Lastly for businesses valued between $5M and $50M, 75% 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.
