M&A Market Pulse 3Q25 – Part 3: Valuation Trends and Deal Dynamics

By: Reizchel Oasay and Ron Buck

The M&A market is constantly evolving.  For buyers and sellers, understanding the latest trends in M&A transactions, including the relationship between asking price and sale price, seller financing, earnouts, and net working capital, is critical.  The information below, from the IBBA and M&A Source report, is crucial for buyers and sellers to develop a strong M&A strategy.

Asking Price vs. Actual Sale Price

Sellers typically receive an average of 91% of their asking price.  This can vary, however, based on the deal’s price range and specific circumstances.  Accurate business valuation and skillful negotiation are key to a favorable outcome. Murphy Carolinas’ long-term average is slightly above 97% (not including earnouts). Pricing the business correctly from the start, with data to back it up, 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: This includes construction and engineering, personal services, business services, manufacturing, retailing, and other.
• $1M – $2M: Here, activity is strong in construction and engineering, manufacturing, personal services, and retailing.
• $2M – $5M: Strong sectors include construction and engineering, manufacturing, personal services, retailing, and business services.
• $5M – $50M: Notable sectors are construction and engineering, manufacturing, personal services, health care and biotechnology, business services, and wholesaling.

Understanding these trends helps buyers identify promising opportunities and allows sellers to position their businesses effectively.

Seller Financing and Earnouts

Seller financing and earnouts are common deal structures.  Their prevalence varies by price range:

• Seller Financing: In the $500K-$5M range averaged 9-14%, in the $5M-$50M range, it averaged 6%.
• Earnouts ranged 1-4% across the spectrum from $500K-$50M.
• Seller Retained Equity: In the $500K-$50M range, it ranged from 0-1%.

These structures offer flexibility and can bridge valuation gaps. However, they 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 (88%-94%), with a transition starting in the $2M-$5M range (54%).
• EBITDA: More common in the $5M-$50M range, where the shift usually occurs (65%).

Net Working Capital (NWC, or AR-AP) is also increasingly included in the sale price as the deal size increases:

• Excluding NWC is common in the $500K-$2M range (66-80%). The $2M to $5M range shows a more even split of 55% excluding and 45% including.
• Including NWC is more common in the $5M-$50M range, where the shift usually occurs (75% include NWC).

Expectations for Valuation Multiples:

Looking ahead, the majority of respondents expect business valuation multiples to remain stable across most price ranges in the coming months:

• $500K – $5M: 67% to 72% expect no change.
• $5M – $50M: 66% expect no change.
• $50M – $100M: 69% expect no change.

However, for those who expect a change, the prevailing sentiment is that multiples will decrease rather than increase. This suggests a lack of optimism creeping into the M&A market.

Key Takeaways for Buyers and Sellers

• Buyers: Research industry trends to identify attractive targets. Be prepared to negotiate various deal structures, including seller financing and earnouts.
• Sellers: Ensure an accurate business valuation. Consider the benefits and drawbacks of seller financing and earnouts to make an informed decision.