Articles

By Brandon Mack

The International Business Brokers Association (IBBA) and M&A Source have recently published their second-quarter market research for 2020. The report is a statistical analysis of 361 respondents who answered this quarter’s 25 question survey. This is the final of a three-part series where I will examine the IBBA’s and M&A Source’s analysis of the market.

For businesses sold for under $500K, the most common industries in this range were consumer goods at 17%, business services at 16%, personal services at 15%, healthcare at 12%, and restaurants at 12%. 91% of deals in this range had no formal exit planning. In the $500K to $1M range, the largest industries in this range were consumer goods at 29%, healthcare at 13%, and business services at 13%. 75% of deals in this range did not have formal exit planning prior to engagement to sell. The most deals per industry in the $1M to $2M range are as follows: construction at 16%, personal services at 16%, manufacturing at 16%, business services at 11%, and consumer goods at 11%. There was more exit planning in this range, as 24% met with an advisor. In the $2M to $5M range, 33% of the businesses sold in this range were in construction, 27% were in consumer goods, and 20% were in business services. 33% of sellers had met with an advisor to discuss exit planning. In the $5M to $50M range, 27% of the businesses sold in this range were in the manufacturing industry, 20% were in consumer goods, and 13% were in business services. Exit planning was more common in this range, as 53% met with an advisor.

In terms of seller financing, in the under $500K range, 13% of the price consisted of seller financing. In the $500K to $1M range, 12% was seller financing, in the $1M to $2M range 13% was, in the $2M to $5M range 10% was, and in the $5M to $50M range 4% was seller financing.

Seller’s Discretionary Earnings (SDE) and Earnings before Interest, Tax, Depreciation and Amortization (EBITDA) remained as the primary valuation metrics. Most of the transactions used SDE not including working capital multiples for businesses valued under $5M, and most of the transactions for businesses sold for over $5M but under $50M used EBITDA including working capital multiples. The inclusion of working capital in the purchase prices becomes more prevalent as the transaction size gets larger. For businesses valued under $500K, working capital was included only 20% of the time. For businesses $500K and $1M, 13% included working capital. For businesses $1M to $2M, 10% included working capital. For businesses $2M and $5M, 47% included working capital. Lastly, for businesses valued between $5M and $50M, 80% included working capital. When looking at comparable multiples, it is important to understand what basis the particular database is using as some explicitly exclude working capital in the calculation, while others include it. In other words, one must be careful not to apply a multiple that excludes working capital to an offer that includes it, and vice versa.