In a recent post I ran through a buyer analysis of a business listed for sale, which we refer to sometimes as a “buyer reality check”. We go through this analysis for every business we represent, before making a recommendation to the owner of an asking price or range for the business. In making our recommendation, we also routinely conduct a “most probable selling price” analysis, comparing the business we are preparing to market to actual completed business sale transactions data for comparable businesses.
Pratt’s Stats, a database of completed business sale transactions published by Business Valuation Resources, is one of the databases we consult in analyzing completed business sale transactions. Recently BVR published its Private Deal Update for the second quarter of 2014, which includes a report of various sales price ratios for several categories of industries and over a period of years. The report utilizes median values for reported figures, since a handful of very large transactions tend to skew mean average results.
Pratt’s Stats uses MVIC to define the sales price of a business transaction, or “market value of invested capital”. This figures includes not only the actual cash paid in the transaction, but also any seller financing or interest-bearing debt assumed by the buyer. It does not include contingent earnout, non-compete or consulting payments. Some of the key ratios analyzed in the Private Deal Update include MVIC/Net Sales, MVIC/EBITDA, and MVIC/SDE. (SDE is “seller discretionary earnings”, which includes in the reported earnings figure any compensation or benefits obtained by a single owner from the business and a few other adjustments to earnings.)
For 2013, the median MVIC/Net Sales was fairly consistent throughout transaction sizes, ranging from 0.47 times net sales for companies with sales from $0 to $1MM, and 0.44 times net sales for companies with more than $1MM in net sales. However, sales multiples do vary considerably based on industry, ranging from 0.31 times net sales for Retail Trade businesses, up to 0.69 times net sales for Transportation, Communications, Electric, Gas & Sanitary. Services (0.56 times) and Manufacturing (0.52) sectors also ranked above the median for all industries, reported at 0.46 times net sales. Construction (.041) ranked below, and Wholesale Trade (0.45) just below, the median MVIC/Net Sales figure for all industries.
Median multiples of MVIC/SDE for 2013 ranged from 1.79 for Retail Trade, to 3.25 for Wholesale Trade. Construction (1.98) ranked below the median for all industries of 2.07, and Services (2.11) just above – in part reflecting the reality that service businesses often enjoy higher profit margins on net sales than many other types of businesses. Manufacturing (2.91) and Transportation, Communications, Electric, Gas & Sanitary (2.93) both enjoyed MVIC/SDE well in excess of the median for all industries.
Multiples of EBITDA reflected similar results, with Retail Trade MVIC at just 2.01 times EBITDA, and Wholesale Trade MVIC at 4.40 times EBITDA, well in excess of the median across all industries of 2.83.
Not surprisingly, MVIC multiples for SDE and EBITDA increase dramatically depending upon transaction size. It is well know that buyers will pay greater multiples of earnings figures for a larger business than they will for a smaller business. Most private equity firms, with substantial amounts of cash to invest in business acquisitions, will not consider a company doing less than $1MM in EBITDA. For companies with revenues of less than $1MM, the median multiple of MVIC/SDE reported by BVR for 2013 was 1.94, and MVIC/EBITDA was 2.29. For companies with $1MM to $5MM in net sales, these figures increase to 2.66 and 4.00, respectively. For companies doing in excess of $5MM in net sales, the figures increase to 4.02 times for MVIC/SDE and 4.54 times for MVIC/EBITDA. (As a caution, this latter category likely includes a number of very large transactions that will skew results – although only private buyer acquisitions are reported – so that a company doing just over $5MM in net sales will not necessarily command the same multiples as the median company in this category, for which results are reported.
While statistics are interesting and useful, in the final analysis every company must be evaluated on its own merits. As a simple example, the company with $5MM in net sales and $1MM in seller discretionary earnings, all derived from two very large client relationships, is most likely worth a good bit less than another company with the same revenues and profitability, but serving a number of smaller clients. Nevertheless, it is helpful to look at market and industry statistics to understand more of how buyers value a business.
We would be happy to share a copy of the Private Deal Update with our clients and referral partners, upon request. We are available for consultation on business sales or acquisitions, at no obligation.
Stephen C. Minnich, J.D.
Certified Business Intermediary
Piedmont Business, LLC
Piedmont Business is a member of the International Business Brokers Association, the largest association of business brokers and merger and acquisition professionals, and the regional Carolinas-Virginia Business Broker Association. Its founder Steve Minnich is a North Carolina licensed attorney, a Certified Business Intermediary of the International Business Broker Association and a CVBBA Board Member. Piedmont Business does not provide legal services.