How Well Are Businesses Selling?
How well and How Fast are Businesses Selling?
The International Business Brokers Association and M&A Source just released a survey on what is happening in the market for business owners that sold or tried to sell their business during the second quarter of 2012. The Graziadio School of Business and Management at Pepperdine University also assisted with the survey.
The survey divided the businesses that sold into one of 5 categories based on the selling price. The categories were:
- Less than $500,000
- $500,000 to $1MM
- $1MM to $2MM
- $2MM to $5MM
- $5MM and more
Here is a look at some of their key findings.
Time to close
- The average time to close a transaction for a business that sold for $1MM or less was 7 months.
- In the $2MM to $5MM range it took an average of 11 months for the transaction to close while 8% of transactions took two years or more.
What is selling?
- Businesses that sold for less than $1MM includes consumer goods/retail, business services, personal services and restaurants.
- For businesses that sold between $1MM and $2MM they were manufacturing (47%), health care and biotech (18%) and construction/engineering.
- For businesses that sold in the $2MM-$5MM range, wholesale distribution (29%), business services (21%), and construction/engineering (21%) accounted for most of the businesses sold.
- Businesses of $5MM or more followed the same trend with manufacturing at 23% and wholesale distribution at 15%.
- 91% of the buyers for business that sold for less than $500,000 were individuals. Of these individual buyers, 58% were first time buyers.
- 50% of the buyers were individuals in the $1MM to $2MM range and the $2MM to $5MM range while 40% were purchased by other companies and 10% by Private Equity.
- In the $5MM range there were no individual buyers, while 31% were purchased by other companies while 62% were purchased by Private Equity.
Reasons for sale
Across all sectors, there were three common reasons for selling and these were retirement, burnout or looking for new opportunities,
- For businesses that sold for less than $500,000, 75% closed with cash, 19% with seller finance and 8% other.
- For the businesses that sold in the $500,000 to $1MM range, $1MM to $2MM range and $2MM to $5MM range, 54% closed with cash, 18% with seller finance, 10% with an earn out, 5% with seller equity and 13% with some other sort of finance.
- For businesses that sold for $5MM and more, 61% closed with cash, 3% with seller finance, 11% with owner retained equity, 12% with an earn out and 13% with some other type of finance.
A rule of thumb to use when valuing a business is based on the amount the owner gets to keep or Sellers Discretionary Earnings (SDE). As the sold price increases, so does the multiple of Sellers Discretionary Earnings.
- For businesses that sold for less than $500,000, 81% had a SDE multiple of 1.5 to 2.5.
- For businesses that sold for $500,000 to $1MM, 83% had a SDE multiple of 2.0 to 3.5.
- For businesses that sold for $1MM to $2MM, 81% had a SDE multiple of 2.0 to 3.0.
- For businesses that sold for less than $500,000, 81% of business sold had a SDE multiple of 1.5 to 2.5
Reasons a business did not sell
The most common reasons a business did not sell and was taken off the market includes:
- The sellers price expectations were too high – 33%
- The business was not prepared for sale – 26%
- The business sales were declining and therefore not attractive to a buyer – 16%
- Poor financial records – 16%
- Other including owner health reasons – 9%
What does the future hold?
The survey shows there is optimism that the economy will continue to get stronger and more business owners will decide it’s now the right time to sell. There is empirical evidence that a lot of business owners have been reluctant to sell while the economy is soft, third party finance difficult for buyers to obtain, whether the seller can get the price they expect and so much uncertainty in the local, regional, national and global economies. However, it is expected that many owners will decide it’s time to sell and enjoy their retirement.