EP 107: Latest Market Data with Ed Mysogland

Ed Mysogland  0:19  
Welcome to another episode of the defenders of business value. I'm your host, Ed Mysogland. And today is one of the fan favorites when market data gets released. So today we're going to talk about the results from Best Buy Sell from the m&a source from deal stats, and then GF data. And what we're like the overall theme seems to be that valuations are holding steady. So so they're we're not seeing a lot of change in in business value multiples changing up or down, you know, to reflect the risk of the market. But what we are seeing is deal volume down. Now different different brokerages and m&a shops have not necessarily reported that maybe in third quarter, but typically in a brokerage, or an or an m&a shop, what we find is that deals tend to happen, their spikes in the fourth and first quarter. So So you need to take some of this information with a little bit of a grain of salt. So we're going to begin this podcast with reviewing each of these four data sources. And if you are listening, there's a YouTube video that I'm sharing the sharing my screen and showing you the market data. They'll also be links in the show notes of everything that I'm talking about. So I hope you enjoyed this episode with the quarter three data. One of the best things that I think bizbuysell does is offer this insight report, it's free for everybody. I'll have a link in the show notes. But every every quarter, they're talking about, you know, the data, the data that's happened in this past in this past in this past quarter. So what I want to share with you is I'm not going to read this to you, but generally speaking, you know, there is, you know, there is a little bit of a drop in, in the number of deals. Alright, so you can see here, and between each of these quarters, you know, we're it, it is behaving the way it historically does year over year, right. You know, 20 and 21. I'm gonna kind of disregard but generally speaking, you know, there's upticks in, you know, in q4, and q1, and then q2, and q3 tend to be down a little bit, what we're seeing here is that the multiples are a little bit down, or I'm sorry, the volume is a little bit down, but you're going to see that here on value, value has stayed value multiples, have stayed somewhat consistent. Alright, so we're here, over the last, you know, over the last couple of years, you know, there's a volatility early, and, you know, the median sale price versus the asking price a little bit, but you can see, generally speaking, that, that the Ask versus the sale price is remaining somewhat constant. Here, we're talking about, you know, the bit, you know, that this is one of the new things that they've been tracking is the biz, biz Buy Sell confidence index. And you can see that, you know, that is kind of all over the board, especially during the pandemic. And now we're we're seeing that, you know, at least half of the half of the sellers are saying is that it's difficult to sell businesses in this environment. And I think the most telling thing is that this index, sellers are thinking that, you know, first, you know, next year is not going to be any necessarily any better. So, when we move over to the actual website, and you can see the URL up in the up in the corner, but we're looking at the business insight report, and we're and what we're looking at is what's called the interactive data. And what I want you to See, especially if you're a business owner, or someone that advises business owners, you can see that the let's look at the multiples here, the average revenue multiple is right here. And there's not a whole lot of volatility. All right. And again, this is all businesses. And I mean, you can, you can crop up, I'm sorry, this is actual, let's look at businesses sold, you can see that the average revenue multiple is between 50 and 60%. All right. And it has been that way, for all of the quarters that and this is again nationwide. So there's not a there's not a whole lot of volatility here. And then you look at cash flow multiple, you're roughly at two and a half times. seller's discretionary earnings defined as Net Income, plus, interest, depreciation, amortization, plus officers comp, in all forms. So so you can see that there's not a whole lot of change that's going on. Even though the cost of capital these days is running roughly about 10%, through the SBA. So that's biz buy, sell. So next, we're gonna move on to deal stats, deal stats is a is a aggregate I shouldn't say aggregator, but it is a it, they collect market data from brokers CPAs public companies, and they compile them into what's called DL stats. And, and people like me, use use that for market data. And when I say market data, the same way a realtor would use different attributes of a of a, of homes that have sold, we're using it as a proxy for value, or at least give us a sanity check to make sure that, you know, what's the investment, you know, theoretically, the investment behavior that a buyer has toward a particular investment theoretically, get given everything being equal, they should, the next buyer should probably behave in a similar fashion. So let's talk a little bit about deal stats, let me share my screen. And we have deal stats. So deal stats, you know, this is a like biz buy, sell, you know, you're seeing the deal stats, you know, the multiples have, in this case have dropped a little bit, you know, they're, they're just a slight decrease and, and as an appraiser in the deal guy, that doesn't really shake me up a whole lot, because there's a, there's a myriad of reasons why the why the the multiple may have changed just a little bit, especially when we're talking about, you know, quarter number two, or quasi quarter number three results. So you can see that you're teetering right around, you know, a multiple of 3.4 times EBIT, da, earnings before interest, taxes, depreciation and amortization. And then you can see the trailing 12, you can see that, you know, it is it is going it's also going in the wrong direction. But as you as we look throughout, from here, 2017 to 2023, you know, generally speaking, the cost of capital had a lot to do with, and the pandemic had a lot to do with, with what was going on in the multiple world. So now, let's go see what what happens when we look at revenue, same kind of thing, there's a little bit of a trail, where, you know, the, we're running roughly 50% of revenue. And so, at 50% of revenue year, you know, that's a rough rule. rough rule of thumb, you know, but the median, and again, and I want to preface preface this that this is based across all all companies not now there's different companies that are different industries that have higher than normal, no revenue as well as EBIT up multiple so don't don't arbitrarily just take you know, 3.4 times EBIT dot, you know, or 50% of revenue and go say that's my my business value because it may not be but generally speaking out this is as a whole looking at all businesses this is this is kind of where they're landing and the the point of the podcast is that you know, the multiple are are are hanging pretty consistent volume does appear to be down interesting that the earnings you know the EBIT da margins continue to remain high.

You see these, these two little peaks here and here you know, most of, you know, some of it was artificial with, with COVID and PPP money and, and different ways that the, you know, the companies were were were were buoyed during the pandemic. But now, you know, they're they're kind of returning to normal, but they're still high. So, you know, businesses that are running out, you're talking to 16% EBIT DOM margin. Now EBIT? Ah, here I am, this is Ed's opinion, I can't, I can't refute it. I say, you know, 15% My bet is that there's some officers compensation embedded in there, My bet is that there is 15% EBIT, da, is, is a pretty strong number. But at the same time, you know, it could very well be that, you know, this is why companies are selling, because they have such a strong EBITDA margin. Alright, you can see here on the next slide, you can see the different industries and information, online businesses are leading the way as far as EBIT on multiples, you know, there's a huge land grab going on for anything online. So we're seeing a lot of this as well as there, there's a lot of micro businesses that are that people are paying a considerable premium, you know, just to get the, the digital footprint. But generally speaking, you can see the last 12 months, there's very few industries that are up over the prior, the prior 12 months. So, you know, take that with a, take that with a grain of salt, but But generally speaking, the the multiples are down a little bit. Yeah, the selling price, you know, here's the median selling price to eBay, you can see, you know, it's remaining, you know, these are the different types of buyers. And I'm looking at, you know, private private buyers, to private sellers, which is this gray line here. And you can see that, you know, it's that the mult, the EBIT, da multiple is a little, you know, is going up fairly consistent, you know, when you start selling to public companies, or private equity groups, is when you're starting to have multiples, that are considerably different, probably considerably higher, but you have to remember that, those, there's a reason behind why those multiples are so high. And that becomes, you know, a strategic reason, meaning that they're the one plus one theory, all of a sudden becomes, you know, the one plus one equals three theory becomes, you know, a considerable reason why the multiple is so high. So, so my point to you is, as you're looking at, at businesses, you know, these life, the lifestyle businesses where the business owner is, is selling from as an individual seller, I'm selling to an individual buyer, yet the multiples are not necessarily changing dramatically. When you start moving into strategic buyers, they are selling the multiples are, can be considerably different, I will include a link to the to, to the studies, so you can see for yourself, but you here, you can you can see that as you look through them, the multiples, don't change a whole lot, meaning multiples don't change a lot similar to a Best Buy Sell. And so, you know, so my point by point is that, you know, the, the biggest thing that a business owner could focus on is earnings not and not really get too shook up on, you know, what the what necessarily the multiple is alright, so that's deal stat. We'll move on to m&a source next. Alright, let's talk about the market pulse survey that was recently released. So market pulse survey, the first thing I want to draw your attention to is again, can it we're, the good news is that we're consistent across many data, data sources. So the first thing is that, you know, is it a seller's market? And the answer is no, it's, it's not. And the reason is, and this, you can see, and we're on the m&a source here, the different the different businesses, you know, they're all tracking somewhat similar, somewhat similar trajectories that were down. And, you know, as we move in, you know, there's a bunch of reasons why it can be it can be the interest rate could be the inflation could be, you know, we're coming into a election year, you know, all those things play into play into, you know, deals. And so my point is, that right now, you know, good businesses, again, are selling and will sell in any environment, those that, say, our marginal but those that aren't necessarily best in class, you know, there's, there's gonna take, it's gonna take some work to get those done. So So I want to draw your attention to do that. Competence is, is is pointing in the wrong direction. As far as being a seller's market business value, I want to draw your attention to the median multiples. So you can see in the last four quarters, and here out, I'll, for those of you that don't have the benefit of of seeing this, I'll I'll, I'll talk you through it. So on, generally speaking, on the businesses that are less than a half a million dollars, consistent across the board, those from half million to a million, generally are speaking, you know, are roughly, and there's not a whole lot, maybe, maybe five 10%, when you get into the one, you know, the one to 2 million, you're starting to see a you know, and you're starting to see a bit of a change, especially when you look at you know, quarter number, you know, this this most recent quarter, so you're still running at, you know, roughly a four a 4x times EBIT, da. And that is somewhat consistent with what has happened in previous quarters. But, again, they're, they're, they're hanging, you know, this, that, that range, the 123 is still hanging on between three and 3.3. When you move to the to, to the two to five, to 2 million to 5 million, you know, you're running Florida, you know, Florida, 4.3. And then, and then when you move into the, into the five to 50, it's just kind of the, it's a strategic value. And I don't wanna say it's all bets off, but, you know, your your tend to be running closer to the sixth multiple. So now you can see that, as far as asked to selling price, you know, they're they, they're, they're hanging in there. You know, the smaller businesses, of course, there's some more volatility and more negotiation, but they're getting roughly 80 8080 to 90%, of ask the 500 to a million are running between 90 and 96. The one to 2 million, same run, you know, 91 to 97. You know, the two to 5 million are, are running over asked, and you say well, why is that? The more Yeah, the I want to say the more educated the more let's just say the more sophisticated the parties are, then the the the deal team that your brain, the greater the chance that you're the structure is going to be more advantageous, not that, that below you know, the five to $2 million ranges is not, but what it is. There's a lot of you tend to be working with a lifestyle owner as opposed to somebody that is working as a team that has tiered management and different attributes that increase the value as you move upstream. So where I'm heading with this is that you're still 90 to 95%. And most deal shops will embed some level of of

padding, you know, just for for negotiation. This next part down here is, is probably another telling reason, one, yeah, this is this is those that are exiting without a plan. And this can solve a lot of the problems 80% of the those that are sub half million, don't have a plan 53% between 500 and a million, don't have a plan, one to 2,000,043% don't have a plan, two to 540 5% don't have a plan, and then the five to 50. It's 29% don't have a plan. But the good news is that it's better than it has been. So the good news is that, you know, there's more of awareness of the exit process. We're not there yet. And I think those you know, those that are underserved, especially the half a million, you know, the, you know, the one to $2 million range the underserved population, I think they they need more hand holding, in order to achieve a superior result. As far as why people are selling retirements continues to be the number one reason the time to close is, you know, it's still running, you know, roughly between, you know, roughly a year to do to do it. There's really not that there wasn't any big changes as far as where the buyers are coming from, you know, they continue to, you know, you're seeing more private equity and strategics that are dipping down into the the one to $2 million dollar range as tuck in acquisitions. But generally speaking, you know, there, it's status quo there, everybody's looking for good deals. So let me see if there's anything else now, so that, that concludes the m&a source. And finally, I wanted to share with you some of the market data for that's from GF data, which is owned by the Association of corporate growth or ACG I want to show you that two things. One, this is for a presentation I'm giving this week to a bunch of attorneys. For those that are that don't have the benefit of the video, what I'm showing is the enterprise value between 10 and 25 million. Yeah, we're running anywhere from 5.72 to six and a half is is the is the multiple. And what I'm, what I'm showing here is that as, as the deal gets bigger, the multiples get bigger, so you can't, where I'm heading with is that you can't just assume, you know, you hear somebody sold that a 10x, you just can't blindly layer that on top of your $5 million company. So what I'm showing you here is, this is across all industries. So the 25 to 50 million, currently is running at a 7x 7.1x 50 to 100 million is running at 7.7 and 100 to 250,000,009.6. And then 250 to 500 million is running at 10.3 times EBIT da and so so when you do have the opportunity to see this on video, you'll see that as the deal gets larger, as does the multiple, and the reason, you know, a little bit of valuation background is is is the multiple reflects risk. So the higher the multiple, the lower the risk. And so and size matters and in doing deals that, you know, the business that has critical mass can offset, you know, potential downturns in the economy, they right now we're seeing a bunch of businesses that are out looking to grow through acquisition it's easier to go out and start picking off competitors than it is to grow organically and so you're going to if you're in the market to to sell you know it wouldn't surprise me if you're hearing from a lot of either private equity groups that are looking at adding to their portfolio, or they are looking at growing through acquisition. The next thing I want to draw your attention to is, is this. Those businesses that are sub 25 million, alright, the, the multiple generally stays pretty consistent till you hit 25,000,025 Millions tends to be the line of demarcation where all of a sudden, it's an entirely, you know, all bets are off as far as multiples go, before that, you can get up to, you know, six, six to 7x EBITA, or one times revenue. But once you hit that $25 million mark, it is like said, all bets are off, and it turns into strategic value. And the multiples can be all over the board as this this graph, that's going up into the right, reflect so. So my my point, with the big the larger businesses, especially if you're, if this is the year you're, if it's this year, or 2024, if you're thinking about selling well, if you're north of $25 million, you know, there, there is good cause for you just to pump the brakes, and either a find a specialist or find somebody that's going to get you some recon on what businesses in your space are selling for, you know, we have a service where we, we have, you know, where we do market studies, where we're engaged to go out and, and under total anonymity, you know, we go out and we figure out, you know, what are the value drivers of these types of businesses and we report, we report back to you, and let you know that, you know, here's, here are the 15 people that are that are looking at buying, and here's why they're buying, and here's here, here's what you need to consider if you're going to enter into the deal theater. So so that's the, that kind of concludes market three market data.

So that concludes, what's going on with with the market data. And, and where deals are, for those of you that are, are exploring, you know, is where do I fit in, you know, we we offer a complimentary service for, for you to do a self assessment, it's called Value builder, it addresses eight drivers of value, it'll give you a pretty good idea of where the chinks in your armor are. If you're not, you're just, you're just exploring and just kind of want to see where you fit in, I give you my word, I'm not going to hassle you, um, I'm not going to, you know, this is not a signal for you to sell. It is just simply a tool that we use, you know, that, that we want, you know, business owners to become more aware. And so if we can help, you know, happy to do it. We're, we've been here for 41 years, we're not gonna go anywhere. So hopefully, that that this episode was helpful to you to see where your your business might be landing. If you need, you have more, more valuation help. I'm always happy to, to come alongside and, and tell you what I know. And I'll let you will let you know way in advance if if I need to turn on the meter. So like I said, 2024 2020, the remainder of 2023 is kind of already in already baked in and I kind of have an idea of what's going to be closing 2024 It's going to be I tend to agree with the rest of the sentiment of, of some of these sources that I cited. May be No, it may. It may be a a more of the same I don't know. But, but if I can help in any way, you know where to find me. Alright, we'll see you next week.