A report on what’s happening in the marketplace.
If you’re buying or selling a small business, or just want to keep up with what’s going on, this survey returned some valuable information.
The William Bruce Report: The Condition of the Private Business-for-Sale Marketplace is a quarterly disclosure of national market conditions from insiders who are professional advisors to business buyers and sellers. William Bruce, the author of this report, currently serves as president of the American Business Brokers Association.
Because the small to medium-sized business-for-sale marketplace is comprised of non-public, closely held businesses with little public reporting required, information is often difficult to obtain.
One authoritative source of quarterly information for this marketplace is the Market Pulse survey conducted jointly by the International Business Brokers Association and the M&A Source. The membership of both organizations is comprised of full-time professionals in the private business-for-sale marketplace.
This survey was conducted from January 1 through 15, and was completed by 382 business brokers and merger and acquisition advisors. Respondents completed 330 transactions in the forth quarter of 2023.
Valuation
Multiples remained relatively consistent across market sectors, with one notable exception. Advisors reported that businesses with values between $5 to $50 million received an average valuation of 5.3 times EBITDA, a meaningful jump over last year, but still down from the red hot market in late 2021.
Businesses selling below $2 million are reflected as a multiple of seller’s discretionary earnings. Above $2 million, the price is quoted as a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization).
Average business value as multiple of earnings by transaction size for year end 2020 thru 2023.
Financing
The financing environment is critical to small business sales and acquisitions.. Economic analysts are predicting several interest rate cuts by the Federal Reserve in 2024. Several SBA (7a) business acquisition lenders are currently aggressive in the marketplace. The top five SBA business acquisition lenders in the country in 2023 were Live Oak, Huntington, NewtekOne, ReadyCap, and Byline. These five lenders in 2023 cumulatively financed $5 billion in business acquisitions.
From the survey, the concern over interest rates is prominently shown in both the graphs below.
Sellers can expect, on average, to receive about 80 percent of total selling price as cash at closing. The graphs below depicts the percentage cash and seller financing at closing by transaction size for the last four calendar year ends.
Top Market Segments
For businesses selling for up to $2 million, the five top industry categories in 2023 are shown below. Restaurants are a perennial leader.
For businesses selling over $2 million, the top three categories in 2023 are listed in the graph below. Engineering firms have become a hot commodity in the last couple of years.
Active Buyers
Individual buyers (below) dominated the under $2 million marketplace Forty-four percent were fist time business buyers, with serial entrepreneurs (buyers who had owned a business before) accounting for 35 percent of buyers in this dollar bracket.
In the over $2 million category, strategic buyers (below) were the top buyers. A strategic buyer is usually a firm already in the same kind or closely related business that wants to increase its geographic footprint or add to their product lines.
Time to Close
The average time to sell a small to medium size business from the time an advisor is engaged to the closing table has stayed fairly consistent, varying from seven to 10 months. Of that time, approximately three to four months are spent in due diligence after an offer is accepted.
In Summary
Despite being the most predicted recession in the history of the United States, it appears it’s not going to happen. According to this survey, the situation is essentially stable in the small to medium size business-for-sale marketplace.
Author’s disclaimer: William Bruce is a member of both the International Business Brokers Association and the M&A Source. He participated in this survey.
For further reading, here are additional articles on the issues of business valuation and ownership transfer:
- How to Use Valuation Guidelines to Estimate the Value of a Business
- What are the “Discretionary Earnings” of a Business?
- How to Analyze a Business You’re Considering Buying
- How to Make a Written CONTINGENT Offer to Buy a Business
- Seven Negotiating Rules When Buying or Selling a Business
- How to Conduct Due Diligence When Buying a Business
