By Reizchel Oasay and Ron Buck
The International Business Brokers Association (IBBA) and M&A Source have recently published their fourth-quarter market research for 2021. The report is a statistical analysis of 416 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 85% of their asking price. For businesses sold in the $500K to $1M range and the $1M to $2M range, sellers received an average of 94% of their asking price. For businesses sold in the $2M to $5M range, sellers received an average of 93% of their asking price. And for businesses sold in the $5M to $50M range, sellers received an average of 113% of their asking price. In general, buyers received a lower percentage of their asking price in 4Q2021 compared to 3Q2021. 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 19% restaurants, 16% personal services, 10% consumer goods & retail, 10% business services, and 10% construction & engineering. In the $500K to $1M range, the most common industries were at 14% personal services, 13% business services, 13% consumer goods & retail, 11% manufacturing, and 11% restaurants. The most common industries in the $1M to $2M range were business services at 17% construction & engineering, 13% manufacturing, 10% consumer goods & retail, 10% business services, and 10% personal services. In the $2M to $5M range, the most common industries were 21% business services and 13% personal services. In the $5M to $50M range, 23% of the business were in wholesale & distribution, 20% manufacturing, 18% construction & engineering, and 10% other industries not mentioned.
In terms of seller financing and earnouts, in the under $500K, 14% consisted of seller financing and 2% was earnout. In the $500K to $1M range, 11% consisted of seller financing and 0% was earnout. In the $1M to $2M range, 8% consisted of seller financing and 2% was earnout. In the $2M to $5M range, 12% consisted of seller financing and 3% was earnout. And in the $5M to $50M range, 6% consisted of seller financing and 4% 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 89% of the time for the under $500K, 80% of the time for the $500 to $1M range, 61% for the $1M to $2M range, 51% for the $2M to $5M range, and 13% for $5M to $50M range. Multiples excluding working capital (vs. including it) were used 74% of the time for the under $500K, 83% for $500 to $1M range, 70% for the $1M to $2M range, 53% for the $2M to $5M range, and only 27% 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: 78% of respondents for deals valued under $500K, 80% of respondents for deals valued in the $500K to $1M range, 77% of respondents for deals valued in the $1M to $2M range, 67% of respondents for deals valued in the $2M to $5M range, and lastly, 66% of respondents for deals valued in the $5M to $50M range. If not staying the same, most expect multiples to increase.
