M&A Market Pulse 3Q24 – Part 3: Valuation Trends and Deal Dynamics

By: Reizchel Oasay and Ron Buck

The M&A market is constantly evolving, and understanding the latest trends in valuation, deal structures, and industry activity is crucial for buyers and sellers. Let’s explore the key findings from the IBBA and M&A Source report and their implications for your M&A strategy.

Asking Price vs. Actual Sale Price

Sellers typically receive around 93% of their asking price on average, but this can vary depending on the deal’s price range and specific circumstances. Accurate business valuation and skillful negotiation are key to achieving a favorable outcome. At Murphy Carolinas, our long-term average is running at 97% (not including earnouts). Pricing the business correctly on the front end, with the ability to back up the price with data, significantly improves this metric. Focusing on revenue and growth while the company is for sale also significantly improves this metric.

Industry Trends

Certain industries are experiencing heightened M&A activity:

• $500K – $1M: Personal services, construction, consumer retailing, business services, restaurants, and other services.
• $1M – $2M: Consumer retailing, personal services, manufacturing, business services, and other services.
• $2M – $5M: Construction, consumer retailing, distribution, and manufacturing.
• $5M – $50M: Construction, manufacturing, distribution, and business services.

Understanding these trends can help buyers identify promising opportunities and sellers position their businesses effectively.

Seller Financing and Earnouts

Seller financing and earnouts are common deal structures, with their prevalence varying by price range:

• Seller Financing: More common in the $500K-$50M range (7%-12%).
• Earnouts: More frequent in the $5M-$50M range (3%).

These structures can offer flexibility and bridge valuation gaps but also have complexities that require careful consideration.

Valuation Metrics, Multiples, and Net Working Capital

Seller’s Discretionary Earnings (SDE) and EBITDA are the primary M&A valuation metrics, with their usage shifting across price ranges:

• SDE: Predominant in the $500K-$2M range (83%-87%), with a transition starting in the $2M-$5M range (72%).
• EBITDA: More common in the $5M-$50M range, where the shift usually occurs (89%).

Net Working Capital (NWC) is increasingly included in the sale price as the deal size increases:

• Excluding NWC: Common in the $500K-$2M range (78%-81%), with a transition starting in the $2M-$5M range (70%).
• Including NWC: More common in the $5M-$50M range, where the shift usually occurs (63%).

Expectations for Valuation Multiples:

The majority of respondents anticipate that business valuation multiples will remain stable across most price ranges in the coming months:

• $500K – $5M: 67% to 76% expect no change.
• $5M – $50M: 66% expect no change.
• $50M – $100M: 70% expect no change.

However, for those who foresee changes, the prevailing sentiment is that multiples will increase rather than decrease. This suggests continued optimism in the M&A market, with buyers potentially willing to pay a premium for quality businesses.

Key Considerations for Buyers and Sellers

• Buyers: Research industry trends to identify attractive targets and be prepared to negotiate various deal structures.
• Sellers: Ensure accurate business valuation and consider seller financing and earnouts’ potential benefits and drawbacks.