EP 115: Business Valuation Multiples Update

welcome to another episode of defenders business value. Today is a fan favorite, it'll be a shorter episode than normal. But it's always seems to do well. And that's when we start talking about market data. So the the year end, market data is now starting to be released. And, and so this first one I want to share, and I've done it, you know, just about every quarter is deal stats. So let's, let's start with that. On the deal stats, you know, deal stats is a is a large database where people like me contribute market data, meaning when we sell a company, we take the various metrics that we sold it for information about the business, and we and we submit it to to the folks that do stats and and they compile it, and then it becomes available to everybody that subscribes to this particular database. It is a it's a great tool, it's probably its biggest To my knowledge, it's the biggest in the in the country as far as the information that it provides, as well as the the number of data points that it offers. Now, I say that, and it, it certainly isn't perfect. I mean, there is no regulatory body in in our business valuation community that says you have to contribute a deal when it's done, like you do in real estate. So, so my point is that it's certainly not perfect information. But I can tell you after we have been in the industry for 30 some odd years, I can tell you that in looking at it, you know, it does, it does hold true as far as the market multiples. Alright, so let's start with that the EBIT da multiples, so, earnings before interest, taxes, depreciation and amortization. So, in over the course of 2023, the multiples actually decreased. And they they returned, you know, the It's entitled that the EBIT on multiples have returned to typical values in 2023. So, in the in this period that was analyzed, the EBIT on multiples across all industries, and again, different industries will will be higher or lower, depending on seasonality and just technology, technology, technological obsolescence and things like that. But across all industries, you know, they were the highest in 2018 at five and then have been have been generally trending South or going down

Speaker 1  3:17  
and and so the multiples

Ed Mysogland  3:23  
yeah have have just continued to kind of just ratchet themselves down and and the biggest reason is cost of capital in my opinion, you know, access to you know, 5% money over 11% Money is part of is certainly part of that. So anyway, we started five in in a five multiple in q3 of 2018. And as of year end 2023 We're at 3.4 Does that surprise me? No. Again, I mean it there's a number of factors that can play into this you know, the multiple that that we talked about the lower the multiple the higher the risk now know that that may have something to do with it. I believe that you know, especially especially with online businesses and such you know, the the risk increases it's not it's not a given that you know, the post sale earnings are going to be are going to be there. Okay? So that's EBIT up now let's talk about you know, we're, if we're if EBIT as kind of normalizing sale sales are going to sales multiples are going to also so in this case, you know, this quarter, net sales multiples were at their highest in 2020 21 at 58% of revenue, so 58% multiplied by your revenue would be would be the multiple, and then it it has moved lower. And, you know, it's roughly it looks like it's about 49% Going into 2024. So the high was at 58%, the it's now kind of stabilized out at 49%. I can tell you, you know, roughly 50% of revenue tends to be you know, it's it kind of hangs out there. I don't think I would, I'm not surprised at all. But again, you know, it's it went down a little bit. You know, the low was in, in 2020, where it was at 43%. But I think generally speaking, yeah, that can be you're talking during COVID and such, I don't, I'm not concerned about that at all. So then when we move into EBIT margins, this one, this one is the, the ones that troubles me. So EBIT on margins have declined, alright? And they EBIT, margin, meaning EBIT da, divided by revenue. So that's that calculates the EBIT margin, and so early for the quarter, you know, it was it was running at roughly 16% of, of revenue. Alright. And so, now, you know, the, the law, I'm sorry, in an early 20, in early to 2023, it was running at roughly a little over 18%. Now, it is running at 16%. So it sort of dropped over the quarter. But more importantly, that the selling price to EBIT. Ah, so the EBIT on multiple has decreased. So earnings, so the earnings multiple, it didn't drop by the same amount, but it did drop and so that that's a little concerning for me. Only because, you know, they should, they should flow together. So there's that means, to me, there's something more out there, especially when risk meaning the multiple differ that, that the companies that there's something up with the company, and what does that mean, it can mean a whole host of things about the business and, and so, so as a as a general statement, you know, when the when the EBIT, multiple decreases, or the multiple decrease is more than the margin decrease. You know, there's there, it makes you pause to try to figure out why. And I think it's too early in the in the season, meaning that we don't have enough data on 20/24 Since we see some other other organizations that released their data, we can we can dig in, but generally speaking, the the EBIT margin has decreased by

Unknown Speaker  8:27  
roughly 15%.

Ed Mysogland  8:31  
Okay, so, so, this So, interesting, the, the companies that have or the industries that have have had the greatest bumps, most industries have decreased as far as their their multiples go with exception of a few. And the few are it you know, so information, anything computer and online related, finance and insurance is up. Other than that, every every industry, multiple I take that back. Real estate, real estate investing is up. Ah, yeah. And that's the, that is the only those are the only three out of roughly 15 industries that we're serving, that were up. Everybody else's is down, not like tons, but enough that they're down. And so, as you look at the multiple across all industries, I mean, it's running, it's running NET 4.1. Now, to me, that's that's not to say an inflated number. I mean, you're talking when I say that you taken the median multiple across all these industries. You've got, you know, you know, online businesses that you know, the the medium multiples running at 16.8, which is a know, four times, four times as much as most of these industries. So my point is that a median multiple of 4.1, which is at, you know, I don't want to say it remains the highest, you know, that that across all industries, but at the same time, you know, it's, to me, it's statistically speaking, I think it's, I think it's kind of just bolstered by the information, the information and finance and insurance industries. Okay, so the multiples that EBIT on multiples for for, again, private companies, we talked about, you know, they decreased from 3.4 to 3.1. So, the 10 year trend, alright, so, again, we've got 15 sectors, that that were that we that we watch, and the sector saw a significant decrease. Now in information technology, and again, this is this is net sales multiples, you know, it dropped from 32% to 24. The SDE multiples increased by 27%. So, the median sellers discretionary earnings, which is even up plus officers compensation plus discretionary and indirect compensation, those multiples declined in nine of the 15 sectors. Alright, at and then, but the SD E, and then the SD multiple for those three that I mentioned increased by 27%. So, as we look at the

Unknown Speaker  11:48  
the even multiples

Ed Mysogland  11:52  
you know, the the sectors that saw the most notable declines were educational services and manufacturing, which is they dropped 26% and 19% respectively. The next thing I want to talk about the the asking price to set the selling price. Alright, so, so interesting that, you know, when negotiations begin between between between buyer and seller begin normally it's it's fair, it's over the years, asking prices to two, selling prices tend to get closer, especially those those of us that are that have been in the industry for a while we've we recognize that a business that's priced outlandish will not likely sell. So historically, that it's gotten better. Now, I know in some parts of the country that you're probably sitting here saying there's no way people sellers are still asking outrageous prices. Okay, having said that. So, the the discount. Now this this is what's interesting. So bizbuysell is a is another another organization that I follow as far as for market data, what's what's happening in industry, and they're asking price to selling price tends to have about a 7% Delta, meaning that you know, the purchase price to what it actually are that the asking price to what it actually sells for is about 7% difference, interestingly enough, that the difference between ask and sale price using deal stats is running between 16 and 18%. Which to me is just Yeah, I don't want to say alarming, but it's surprising that this one was a surprise for me. The for those of you thinking about selling, everybody wants to know how long it takes to sell a company in 2020. For the average, the average time was 241 days. And then let's see my last. The last thing that I wanted to share was everybody wants to know what 24 looks like. I think it looks a lot like 23. I think that the SBA has has done a really remarkable job as far as opening up some capital avenues for us. I think that there will be a lot of opportunity for people to get fair, fair values. I think that the industry consolidations going on, I think the prices that were being paid will probably return to now making sense You know, a lot of the the people a lot of the strategics without by the financial buyers, and like they normally do, but the margin was considerably was considerably larger for now. I think that there's more risk in the marketplace. And I think that a lot of and let's just talk HVAC, you know, people paid just outlandish, outlandish multiples for HVAC companies. And you know, just to buy the the customers? Well, you know, now it's, there's a number of companies out there that have have totally overspent and when cost of capital increases, like, again, let's just use SBA as an example. You know, it jumps from, you know, 556 percent to 11 1111 and a half percent, that just beat that just totally beats up your cash flow. And so, so what I, where I'm going with it is I, I still think it's a, if you're selling, I think it's a great time to be be in the market to sell if you're a buyer. I think there's a lot of sellers that are that are coming on board. I know from our from our practice, we're as busy as we've ever been, we had a record year last year, and we're probably going to have another record year this year. So my point, you know, multiples are great. And I don't, I don't mean to, to discount them. I do believe that the multiples give us a an area of what the business is going to sell for. However I do, I do believe that only only a process can can really determine what the market thinks so and so unfortunately, there's no real way to get there unless you actually put the business on the market and take it through a process. One of the things that that I've been doing a lot of this past year and I'm seeing more of it is presale count consultation, you know, just just hypothetically, what is the sale look like? And what are the buyer? How are the buyers going to react toward my particular business? So if that's something that interests you, I'm happy to kind of sit down and just go through the things that that we're seeing buyers ask for so so it's not a surprise to you when you get to the market. All right, I've I hope you enjoyed this episode and I'll be at shorter. If you have any questions on deal stats, I'll also have the the report itself available on my website, you are more than welcome to take a look at it. Alright, thanks so much. See you next week.