EP 25: Just Out! Q1 2020 Deal Stats

Ed Mysogland  0:00  
First thing I'm sorry for my hiatus, it was not intentional I, I just screwed up. I mean, I had a slew of, of episodes in the can. And all of a sudden, a number of people canceled leaving me without episodes. So I apologize, I'm normally a pretty consistent guy. So this week, we're going to talk about DL stats, the first quarter 2020 review just came out. And for those of you that don't know about DL stats, this is the market data that most appraisers use for, for the smaller companies, you know, under $20 million in revenue. And it's produced by business value resources, which, you know, they've been collecting private company data for, gosh, I'll betcha 30 years or so. This installment of deal stats is an interesting one, we're we're going to talk about some of the decreasing earnings multiples that are coming up. So let's get into it. Thanks for listening. Please, welcome please welcome welcome. This is another episode of the defenders of business value podcast, a podcast where we talk about what makes a business valuable tips and tactics to increase your company's value that only veteran filmmakers know. And now here's your host, it meisterplan. So the first thing we we notice in this latest report by deal stats is that the EBIT, da multiples have declined again, and EBIT da for those of you that are unfamiliar with the term, its earnings before interest, taxes, depreciation and amortization. It, it tends to be a useful metric for valuing companies. So over the last, let's see over the last four or five quarters, that the EBIT, da multiples have decreased. And so that's a that's pretty interesting. From a, what does that tell us? I don't think that there's necessarily a challenge on the horizon. I think that we're seeing a lot of business owners that have held on to their companies and probably have not reinvested and as a result, buyers are penalizing the sellers, for some of that capital expenditure that they're going to have to make. So as we look at the Bedarf, margins, and or multiples and margins. The interesting thing is that the margins, the EBIT, Dom, margin, over across all industries seems to remain steady at 11%. And then, as we look at across all industries, the EBIT da multiple is 4.4. So some of the higher performing company or industries that that we're seeing, see, I'll give you the top three Information Services, which shouldn't be a surprise to anybody I mean, information, anything related to information and the sale or the use of it certainly commands a premium. Next is mining, quarries, oil and gas extraction, that historically has always been a fairly aggressive area to be in that, that multiples running roughly at 8.6. And then coming in third place is finance and insurance. So it's probably a pretty good time to be in, in that space also. Next, we'll talk a little bit about pricing, multiples and profit margins. And the first thing I guess I want to address is that size matters in business valuation. So the larger the company, the higher the multiples it just, it's just that way. And the reason it's critical mass, I mean, when, when a large company has a bump in the road, it you don't necessarily feel it as much as if you have one or two people in your shop and something happens to one of them. And so anyway, that's keep that in mind as we continue through this. So as we look at at the median selling price and net sales, it is the larger companies are running roughly about 1.4 times revenue. But the smaller companies and when I say that, I'm talking zero to 10 million in revenue, I mean, it is virtually virtually identical. And that's coming in just a roughly 50% of revenue, which believe it or not happens to be a real real rough rule of thumb. So and it by the way, that and it has been that way since 2010. So over the course of the decades, there's not a whole lot of volatility in, in the revenue multiple. And I guess what I'd like for you to take away from this is multiples integrant, granted, you have to do some value work. But generally speaking, the multiples, when you're dealing sub $10 million in revenue, it's just not a wild ride like it is in the stock market, it multiples stay roughly the same. And so over the course of the 10 years, the larger the company that five to 10 million have had a little bit of variability. But the the 5 million and below, they, they just tracked pretty much the same at roughly 50%. So then, when we look at multiples, same kind of thing, the larger the company, the higher the multiple, with the exception of this year for the 10 million and greater. Again, the multiple keeps dropping a little bit it's and this is when I say the multiple hear this is sellers, discretionary earnings. And the calculation for it is you add to the net income, your EBIT, da. Alright, so your earnings before interest, taxes, depreciation and amortization, your direct officers compensation and any discretionary or non recurring expenses. And that'll give you your SD or seller's discretionary earnings. So as you as we're looking at the median selling price for your your five, believe it or not the five to $10 million multiple jumped a little bit between 2018 and 2019, up to about three, eight, 3.8 3.9. Same thing with the same thing with the one to 5 million and and the sub million dollar revenue companies. I mean, it's tracking between two and three. And again, that's across all industries. That's not to say that it doesn't, that's not to say that other industries have higher multiples, but as a an overall, look, it's small business deals. They're tracking roughly between two, two times and three times SDE or seller's discretionary earnings. Next, let's look at industry pricing multiples and profit margins and how they compare. So deal stats did an analysis across 18 industry sectors. And when we look at the the target companies that have within industries that are asset heavy, meaning that, you know, there's a lot of tangible assets, they clearly trade at higher revenue and earnings based multiples than other industries. And so probably, you're asking yourself, why is that? Well there, it's likely because credit is so good right now that you have an awful lot of leverageable assets that facilitate premiums being paid. So as we look across all the 18 industries, your average multiple of revenue is 54%. Now some of the higher producing the higher producing multiples would be AG, mining, utilities. Certainly manufacturing information that I mentioned earlier, finance, real estate, professional services

just to name a few and I think that was six or seven that are above the the median. Now, as far as what's what's dragging Well, as you might expect retail, so anything that is going up against Amazon, you know, they're sucking wind a little bit. So the next couple of things I want to talk about are the the discounts between asking price and sale price as well as the time it takes to sell a company. So first one, the discounts. So what we're seeing or what deal stats is confirmed is that there is a little bit of a discount between asking price and sale price and And right now it is approximately 87% of asking price. And I think we're we're seeing, we're seeing the same thing. In our shop, one of the things that has considerably changed the landscape of the deal making at least in in, 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, we're just in a in a little bit more of a difficult situation to to effectively sell it now, I can tell you those that do valuation work and those that learn how their business is going to be viewed through buyers eyes, it's an entirely different, entirely different situation. And almost, we're running between 70 and 80% success ratio, when we do that depth of analysis, and for you business owners, I would strongly suggest that you get a hold of somebody that does value work and, and help you understand how a buyer is going to look at your business when that time comes to sell. So next, the time to sell a company. This has been fairly consistent to and again, this is across all industries, but all private targets that that we're looking at. And it it's running roughly 214 days, over the course of the six years that um, I'm looking at, you know, in 2014 15, and part of 16. I mean, it was it was running a little shy of 200 days, and only 17 through the end of 2019 Are we getting above the median of 207 days? So, I mean, if I'm a business owner I'm planning on, you know, it's gonna take nine months to sell the company. So that's about it from deal stats, I'll have a link so you can go to deal stats and download this, this report. Now, obviously, they're going to ask you for your, your contact information in order to get it but nevertheless, it's it's a good it. If you follow valuations, it's a it's a real helpful tool to see what's happening. So the main takeaways that for you business owners out there, those sub $10 million companies, those multiples don't vary widely. So you're so 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 I can do for you, I would be happy to share what what I know. And I'll I'll be candid when I have to turn on the meter. So thanks so much for listening, and I'll see you next week.