By Ethan Parker and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their first-quarter market research for 2023. The report is a statistical analysis of 371 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.
Asking Price vs. Actual Sale Price:
Sellers do not always get their asking price. Overall, sellers received an average of 90% of their asking price. For businesses sold in the $500K to $1M range, it was 94%. For businesses sold in the $1M to $2M range, it was 92%. For businesses sold in the $2M to $5M range, it was 98%. And for businesses sold in the $5M to $50M range, sellers received an average of 97% of their asking price. In general, buyers received a similar percentage of their asking price in 1Q2023 compared to 4Q2022. At Murphy Carolinas, our long-term average is running 97% – 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.
Common Industries for Business Sales Across Price Ranges:
For businesses sold in the $500K to $1M range, the most common industries were 28% consumer goods and retail, 19% business services, 17% construction and engineering, and 9% personal services. The most common industries in the $1M to $2M range were 27% business services, 16% construction and engineering, 16% personal services, 14% health care and biotech, and 11% wholesale and distribution. The most common industries in the $2M to $5M range were 33% construction and engineering, 20% business services, 14% manufacturing, and 10% wholesale and distribution. And in the $5M to $50M range, 29% construction and engineering, 14% manufacturing, 10% wholesale and distribution, 10% business services, and 10% consumer goods and retail.
Seller Financing and Earnouts in Business Sales:
In terms of seller financing and earnouts, in the $500K to $1M range, 10% consisted of seller financing and 1% was earnout. In the $1M to $2M range, 13% consisted of seller financing and 2% was earnout. In the $2M to $5M range, 9% consisted of seller financing and 2% was earnout. And in the $5M to $50M range, 9% consisted of seller financing and 3% was earnout. The four-quarter average was 11% seller finance (plus 1% of earnout) for the under $2M range, 8% (plus 2% of earnout) for the $2M to $5M range, and 9% (plus 3%) for the $5M to $50M range.
Primary Valuation Metrics and Multiples used in Business Sales:
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) remained the primary valuation metrics/multiple types. Specifically, SDE (vs. EBITDA) was used 88% of the time for the $500 to $1M range, 75% for the $1M to $2M range, 63% for the $2M to $5M range, and 5% for $5M to $50M range.
Is Net Working Capital Included in the Price?
Multiples excluding working capital (vs. including it) were used 85% for $500 to $1M range, 75% for the $1M to $2M range, 64% for the $2M to $5M range, but only 48% for the $5M to $50M range (which is historically where the shift occurs).
Expectations for Business Valuation Multiples in the Next Three Months:
In terms of expectations for business valuation multiples in the next three months, most multiples are expected to increase for the following ranges: 49% of respondents for deals valued in the $500K to $1M range, and 48% of respondents for deals valued in the $1M to $2M range. And the following ranges are expected to stay the same: 46% of respondents for deals valued in the $2M to $5M range, and 53% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to increase.
