By Reizchel Joy Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their second-quarter market research for 2021. The report is a statistical analysis of 315 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 only received 88% of their asking price. For businesses sold for under $500K, the average was 82% of their asking price. Businesses sold between $500 to $1M range received 93% of their asking price. Businesses sold between $1M to $2M range received 94% of their asking price. For businesses sold in the $2M to $5M range, sellers received an average of 95% of their asking price, and for businesses sold in the $5M to $50M range, sellers received 100% of their asking price. Overall, buyers have received a lower percentage of their asking price in 2Q2021 compared to 1Q2021. 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 personal services at 17%, consumer goods at 16%, business services at 16%, and restaurants at 12%. 81% of deals in this range had no formal exit planning. In the $500K to $1M range, the most common industries were personal services at 19%, business services at 12%, healthcare and biotechnology at 12%, and manufacturing at 11%. 54% of deals did not have formal exit planning prior to engagement to sell. The most common industries in the $1M to $2M range are construction at 34%, basic materials and energy at 11%, and consumer goods and retail at 9%. 57% of the deals in this range had no formal exit planning. In the $2M to $5M range, 16% of the businesses sold were in construction and engineering, 16% were in business services, 12% were in consumer goods, and 12% were in manufacturing. 58% of the deals in this range had no formal exit planning. In the $5M to $50M range, 21% of the businesses sold were in the manufacturing industry, 21% were in construction, 14% were in consumer services, and 14% were in wholesale & distribution industries. 57% of the deals in this range had no formal exit planning.
In terms of seller financing and earnout, in the under $500K range, 11% of the price consisted of seller financing and 2% earnout. In the $500K to $1M range, 6% was seller financing without any earnout, in the $1M to $2M range, 7% was seller financing and 2% earn-out, in the $2M to $5M range 10% was seller financing and 2% earn-out, and in the $5M to $50M range, 3% was seller financing and 11% earn-out. As this quarter was a bit of an anomaly, looking at the four-quarter average in the under $500K range, 13% of the price consisted of seller financing and 2% earnout. In the $500K to $1M range, 8% was seller financing with 2% earn-out, in the $1M to $2M range, 9% was seller financing and 3% earn-out, in the $2M to $5M range 8% was seller financing and 2% earn-out, and in the $5M to $50M range 8% was seller financing and 6% earn-out
Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA) remained as the primary valuation metrics/multiple types. Most of the transactions under $2M in value used SDE Not Including Working Capital multiples for businesses valued under $2M (at 76%, 77%, and 63% respectively for the <$500K, $500K to $1M, and $1M to $2M valuation ranges). The $2M to $5M range is transitional, with 48% using SDE Not Including Working Capital, 28% using SDE Including Working Capital, 16% using EBITDA Not Including Working Capital, and 8% using EBITDA Including Working Capital. The $5M to $50M switches to EBITDA and Working Capital Included as the most common metrics. Specifically, SDE (vs. EBITDA) was used 94% of the time for the under $500K, 89% of the time for the $500 to $1M range, 80% for the $1M to $2M range, 76% for the $2M to $5M range, and 36% for $5M to $50M range. Multiples excluding working capital (vs. including it) were used 81% of the time for the under $500K, 86% for $500 to $1M range, 72% for the $1M to $2M range, 64% for the $2M to $5M range, and only 21% for the $5M to $50M range.
In terms of expectations for business valuation multiples in the next three months, 75% of respondents expect multiples for deals valued under $500K to stay the same, 74% for deals valued from $500K to $1M, 66% for deals valued from $1M to $2M, 60% for deals valued from $2M to $5M, and lastly, 53% expect multiples to stay the same for deals valued from $5M to $50M. If not staying the same, most expect multiples to increase.
