Q1 2020 Deal Stats
This week we’ll talk about DealStats. The 1st Quarter 2020 review just came out. For those of you who don’t know about DealStats, this is the market data that most appraisers use for the smaller companies – those with under $50M revenue. And it’s produced by Business Value Resources. BVR has been collecting private company data for about 30 years or so and is the premier data provider for those serious about providing sound advice based on empirical data.
1:22 – EBITDA multiples have declined again. What does this mean?
3:40 – Pricing multiples and profit margins
7:40 – Industry pricing multiples and profit margins and how they compare
9:30 – The discounts between asking price and sale price
11:13 – The time it takes to sell the company
11:57 – The main takeaway for business owners
Learn More From This Podcast
EBITDA multiples have declined again. What does this mean?
Over the last four to five quarters the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples have decreased. What does that tell us? According to Ed, he does not think that there’s necessarily a challenge on the horizon. He thinks that we’re seeing a lot of business owners that have held onto their companies and probably have not reinvested, and as a result, are penalizing the sellers for some of that capital expenditure that they’re going to have to make.
As we look at EBITDA multiples and margins, the interesting thing is the EBITDA margins across all industries seem to remain steady and 11%, and then as we look at across all industries, the EBITDA multiple is 4.4%.
Here are the top 3 higher-performing industries that were seen with these numbers.
1. Information services
2. Mining, quarries, oil, and gas extraction
3. Finance and insurance
Pricing multiples and profit margins
Size matters in business valuation. The larger the company the, higher the multiple. It’s critical mass. When a large company has a bump in the road, you don’t necessarily feel as much as if you have just a couple of people in your shop and something happens to one of them.
So as we look at the median selling price to net sales, the larger companies are running roughly about 1.4 times revenue, but the smaller companies (companies with $0-$10M in revenue) are virtually identical. And that’s coming in just roughly 50% of revenue which, believe it or not, happens to be a really rough rule of thumb. And it has been that way since 2010. Over a decade there’s not a whole lot of volatility in the revenue multiple.
What Ed wants for you to take away from this is that multiple, you have to do some value work, but generally speaking, the multiples when you’re dealing sub-$10M in revenue, it’s just not a wild ride like it is in the stock market. Multiples stay roughly the same. And over the course of 10 years, the larger the company ($5M-$10M) has a little bit of variability, but the companies that are earning $5M and below they track pretty much the same 50%.
But when we look at multiples, the larger the company the higher the multiple. Except for this year for the $10M and greater, the multiple keeps dropping a little bit. The multiple is the Seller’s Discretionary Earnings. It is calculated as:
Net income + EBITDA + direct officer’s compensation + non-recurring expenses = SDA
As we’re looking at the median selling price, believe it or not, the $5M-$10M multiple jumped a little bit between 2018 and 2019 up to about 3.8% to 3.9%. Same thing with the $1M-$5M and the sub-$1M revenue companies. They’re tracking between 2%-3% and again that’s across all industries. That’s not to say that other industries are higher multiples but as an overall look at small business deals. They’re tracking roughly between 2 times and 3 times SDE or Seller’s Discretionary Earnings.
Industry pricing multiples and profit margins and how they compare
DealStats did an analysis across 18 industry sectors. When we looked at the target companies that are within industries that are asset-heavy, meaning they have a lot of tangible assets, they clearly trade at higher revenue and earnings-based multiple than other industries. If you are asking yourself why that is, it’s likely because credit is so good right now that you have a lot of leverageable assets that facilitate premium being paid.
As we look across all the 18 industries, your average multiple of revenue is 54%. Some of the higher producing multiples would be at mining, utilities, manufacturing, information, finance, real estate, professional services, just to name a few. Now, as far as what’s dragging, as you might expect, retail.
The discounts between asking price and sale price
What DealStats has confirmed is that there is a little bit of a discount between the asking price and sale price. And right now it is approximately 87% of the asking price. One of the things that have considerably changed the landscape of deal-making, at least in our place, is doing valuation work. Those business owners that come in cold and just want to go to market without doing a lot of understanding what creates value in the company were just in a little bit more of a difficult situation to effectively sell it. Those that do valuation work and those that learned how their business is going to be viewed in the buyer’s eyes are an entirely different situation. We’re running between 70% and 80% success ratio when we do that depth of analysis. And for you business owners, Ed strongly suggests that you get hold of somebody that does value work and help you understand how a buyer is going to look at your business when the time comes to sell.
The time it takes to sell the company
This has been fairly consistent too, and again this is across all industries and all private targets that we’re looking at. It’s been running roughly 214 days over the course of the 6 years that Ed has been looking at. In 2014, 2015, and part of 2016, it was running a little shy of 200 days, and only in 2017 through the end of 2019 are we getting above the median of 207 days. If you’re a business owner, plan on taking 9 months to sell a company.
The main takeaway for business owners
You can visit https://www.bvresources.com/products/dealstats to download the Q1 2020 DealStats report. If you follow valuation, it’s a really helpful tool to see what’s happening.
The main takeaways for business owners out there, those sub-$10M companies, is that those multiples don’t vary widely. For planning purposes, getting some guidance on value should be able to lead you to a successful exit.
And as always, if there’s anything that Ed can do for you, he’ll be happy to share what he knows and he will be candid when he has to turn on the meter.
Thank you for listening. See you next week!