By Reizchel Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their second-quarter market research for 2022. The report is a statistical analysis of 355 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 88% of their asking price. For businesses sold in the $500K to $1M range, it was 95%. For businesses sold in the $1M to $2M range, it was 89%. For businesses sold in the $2M to $5M range, it was 102%. And for businesses sold in the $5M to $50M range, sellers received an average of 106% of their asking price. In general, buyers received a higher percentage of their asking price in 2Q2022 compared to 1Q2022. 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 24% restaurants, 14% personal services, 12% business services, and 11% consumer goods & retail. In the $500K to $1M range, the most common industries were 20% business services, 14% restaurants, 14% construction & engineering, and 11% consumer goods & retail. The most common industries in the $1M to $2M range were 20% business services, 14% personal services, 14% manufacturing, and 11% consumer goods & retail. The most common industries in the $2M to $5M range were 17% construction & engineering, 11% manufacturing, and 11% personal services. And in the $5M to $50M range, 29% construction& engineering, 24% manufacturing, 19% personal services, and 10% business services.
In terms of seller financing and earnouts, in the under $500K range, 12% consisted of seller financing with 1% as an earnout. In the $500K to $1M range, 14% consisted of seller financing and 1% was earnout. In the $1M to $2M range, 10% consisted of seller financing and 0% was earnout. In the $2M to $5M range, 6% consisted of seller financing and 3% was earnout. And in the $5M to $50M range, 12% consisted of seller financing and 2% was earnout. The four-quarter average was 11% seller finance for the under $2M range, 9% for the $2M to $5M range, and 7% for the $5M to $50M range.
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 91% of the time for the under $500K, 80% of the time for the $500 to $1M range, 72% for the $1M to $2M range, 63% for the $2M to $5M range, and 10% for $5M to $50M range. Multiples excluding working capital (vs. including it) were used 74% of the time for the under $500K, 77% for $500 to $1M range, 74% for the $1M to $2M range, 80% for the $2M to $5M range, and only 38% 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: 55% of respondents for deals valued under $500K, 54% of respondents for deals valued in the $500K to $1M range, 59% of respondents for deals valued in the $1M to $2M range, 56% of respondents for deals valued in the $2M to $5M range, and lastly, 54% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to decrease.
