By Reizchel Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their first-quarter market research for 2022. The report is a statistical analysis of 360 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 market analysis.
Sellers do not always get their asking price. Overall, sellers received an average of 92% of their asking price. For businesses sold for under $500K, the average was 87% of their asking price. For businesses sold in the $500K to $1M range, sellers received an average of 94%. For businesses sold in the $1M to $2M range, sellers received an average of 93%. For businesses sold in the $2M to $5M range, sellers received an average of 92%. And for businesses sold in the $5M to $50M range, sellers received an average of 107% of their asking price. In general, buyers received a lower percentage of their asking price in 1Q2022 compared to 4Q2021. At Murphy Carolinas, our average runs about 96% (before earn-outs) – 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 growth while the company is for sale.
For businesses sold for under $500K, the most common industries in this range were at 28% restaurants, 23% personal services, 13% business services, and 12% consumer goods & retail. In the $500K to $1M range, the most common industries were 16% consumer goods & retail, 15% other industries, 14% business services, 14% personal services, 12% restaurants, and 11% construction and engineering. The most common industries in the $1M to $2M range were 24% construction & engineering, 18% personal services, 16% other industries, 10% healthcare and biotechnology, and 10% consumer goods & retail. In the $2M to $5M range, the most common industries were 22% construction & engineering, 22% other industries, and 16% consumer goods & retail. And in the $5M to $50M range, 30% manufacturing, 15% construction & engineering, 15% other industries, 10% healthcare and biotechnology, 10% consumer goods & retail, and 10% of the business were in wholesale & distribution.
In terms of seller financing and earnouts, in the under $500K, 17% consisted of seller financing with 0% as an earnout. In the $500K to $1M range, 10% consisted of seller financing and 2% was earnout. In the $1M to $2M range, 8% consisted of seller financing and 1% was earnout. In the $2M to $5M range, 9% consisted of seller financing and 1% was earnout. And in the $5M to $50M range, 4% consisted of seller financing and 2% was earnout.
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) remained as the primary valuation metrics/multiple types. Specifically, SDE (vs. EBITDA) was used 94% of the time for the under $500K, 86% of the time for the $500 to $1M range, 84% for the $1M to $2M range, 75% for the $2M to $5M range, and 25% for $5M to $50M range. Multiples excluding working capital (vs. including it) were used 78% of the time for the under $500K, 85% for $500 to $1M range, 82% for the $1M to $2M range, 59% for the $2M to $5M range, and only 35% for the $5M to $50M range.
In terms of expectations for business valuation multiples in the next three months, most multiples are expected to stay the same for the following ranges: 65% of respondents for deals valued under $500K, 69% of respondents for deals valued in the $500K to $1M range, 68% of respondents for deals valued in the $1M to $2M range, 66% of respondents for deals valued in the $2M to $5M range, and lastly, 64% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to decrease.