By Brandon Mack
The International Business Brokers Association (IBBA) and M&A Source have recently published their fourth-quarter market research for 2020. The report is a statistical analysis of 363 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 84% of their asking price. Businesses sold between $500K and $1M received 88% of their asking price. Businesses sold between $1M and $2M received 91% of their asking price. The $2M-$5M range received an average of 102% of their asking price, and the $5M to $50M received 101% of their asking price. 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 restaurants at 20%, business services at 16%, and personal services at 15%. 82% of deals in this range had no formal exit planning. In the $500K to $1M range, the largest industries in this range were construction at 18%, and business services at 16%. 71% 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 26%, manufacturing at 17%, personal services at 14%, healthcare at 10%, and business services at 10%. Still 68% of businesses had not formal exit planning. In the $2M to $5M range, 20% of the businesses sold in this range were in consumer goods, 16% were in business services, 16% were in manufacturing, 12% were in construction, and 12% were in wholesale. 44% of sellers had met with an advisor to discuss exit planning. In the $5M to $50M range, 25% of the businesses sold in this range were in the manufacturing industry, 17% were in information technology, 17% were in business services, and 13% were in construction. Exit planning was even more common in this range, as 52% met with an advisor. 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, 11% of the price consisted of seller financing. In the $500K to $1M range, 10% was seller financing, in the $1M to $2M range, 6% was, in the $2M to $5M range 5% was, and in the $5M to $50M range 9% 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, 18% included working capital. For businesses $1M to $2M, 26% included working capital. For businesses $2M and $5M, 44% included working capital. Lastly, for businesses valued between $5M and $50M, 92% 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.
