Q3 2018 Market Pulse report
The quarterly IBBA and M&A Source Market Pulse Survey is now available. The Market Pulse Report comes with the help of Pepperdine University and the Graziadio Business School. The goal of the quarterly survey is to gain an accurate understanding of the market conditions for businesses being sold in Main Street (values $0-$2,000,000) and the lower middle market (values $2,000,000 to $50,000,000).
The Market Pulse report is put together with a national survey to provide a valuable resource to business owners considering selling their business and their advisors.
The Q3 2018 survey includes the responses of 271 business brokers and M&A advisors.
Businesses sold by deal size
In Q3 2018 there were a total of 237 businesses that closed escrow or were sold.
Per the graphic below, 45% of the businesses to be sold were valued at under $499,000.
Sellers are not preparing for success
Selling a business includes a large number of complexities. This includes keeping the name of the business for sale confidential so customers and employees don’t know the business is for sale. It also includes knowing when to provide a buyer a copy of tax returns, a properly prepared business valuation, how to negotiate with the landlord, CPAs, attorneys and other key players in the transaction plus more.
The business owner typically has no strategy or done any preparation so the business presents as strongly as possible.
As the graphic below shows, 67% of business owners did no exit planning before trying to find a buyer of their business.
What is the value of sold businesses?
One of the most important questions to a business seller is to know the value of their business. There is no “one size fits all” answer to this question as business values change depending in a multiple of factors. These include the business gross revenue, the industry, what’s happening with interest rates and not only the national and state economies but also the local economy.
As the graphic below shows, the median Sellers Discretionary Earnings (SDE) multiple paid for a business came with a range of 2 to 3.8. For example, if the owner of the business was generating Sellers Discretionary Earnings or SDE of $250,000 per annum they could expect to sell the business for a multiple of 2 or $500,000.
Top reasons to sell a business
There are generally many reasons why a business owner wants to sell their business. The reason for wanting to sell varies with the size of the business.
As the graphic below shows and its what you would expect, but the number one reason to sell a business is that the owner wishes to retire.
Who is the typical buyer of a business?
Everyone wants to own a business. Its part of the American Dream. When it comes to buying a business, however, buyers are very choosy. In fact, it is believed that only about 2% of those that look to buy a business follow through and make the buying decision.
The purchase price of the business is one of the most important criteria. The graphic below shows the type of buyer that is looking to buy their business.
How far will a buyer travel to buy a business?
The marketing of a business to attract a potential buyer goes far and wide, especially in view of the internet and its ability to quickly and easily share information. Most business buyers, however, are reluctant to travel too far due to the cost of wear and tear on a vehicle as well as the time it takes.
As the graphic below shows, more than 50% of buyers will travel less than 20 miles.
What is the buyer motivation to buy a business?
The sale of a business occurs when a motivated seller comes to an agreement with a motivated buyer.
As the graphic below shows, the higher the business purchase price the greater the motivation for buying a business changes from buying a job to buying a business because it’s a fit for the business owners existing business.
Is the time right to sell your business?
If you own a business and are thinking of selling it is tempting to look at the data in this report to help guide your decision. No question, data is good.
It is important to remember that when selling a business is that it doesn’t happen quickly. The average time it takes to sell a small business is approximately 8 months, but it is critical to remember that only about 25 per cent of businesses sell.
Why don’t businesses sell?
The reason businesses don’t sell are due to different factors. These factors include major changes to the industry the business is in, for example, consider what is now happening to the auto industry with GM planning to cut 15% of their work force in the US. New technology is forcing GM and other auto makers to invest in new ways to make vehicles. This will have a flow on effect to businesses and the local economy where these changes are going to take place.
This means that some business owners that have left their decision to sell too long and will now see the pool of willing and motivated buyers decline.
Other reasons a business is not able to be sold includes inaccurate or poor financial statement or presenting the business very poorly to potential buyers.
If you are ready to sell your business, the first steps are to get a business valuation. The steps I take to prepare a business valuation are to not only assist the seller with what their business is worth in their industry but also look at it from a buyer’s perspective that needs to get a loan to help finance the purchase of the business. If you’d like to know more, click this link to see a Sample Business Valuation.
There are many steps to sell a business. If you’d like to know those steps, click this link to see a summary of the Many Steps to Sell a Business.
If you have questions about selling your business, contact us here at Rogerson Business Services to see how we may be able to help you.