One of the frustrating parts of our business is the misinformation, wild opinions, and “experts” who opine on process and valuation with little to no experience in this business or in the sale of businesses. MBA, former corporate types, lawyers and CPA’s with two or three transactions under their belts give opinion like they are Moses on the mount.
Its natural, human nature indeed to see this occur. The hard reality is that no deal is the same and the time and circumstances vary widely so knowing a good deal is hard. For well over 45 years and 11,000 plus transactions (and growing) we have seen a “thing or two”.
We recently went in and pulled some data from our archives….nothing earth shattering to those of us who live deals daily but for the un tested there are some key data points to take away.
Data Point 1: Increasing Multiples
For the last year and indeed generally through Covid once consumers settled in and sellers tuckered out of the continued fight (think about it, business owners have really been kicked in the teeth over the last decade) we saw inventory shrink and the free money pumped in the system allowed business owners to shore up their balance sheets and get stronger performance. With low inventory, lingering covid effects of mandates we saw great activity and subsequently multiples went up. Now do not get excited because hot markets must cool and inflation impacts our world….look for another quarter of strength and then tapering off on multiples as business reported performance is impacted by inflation…..some of you may have missed your window.
Data Point 2:Price to Sold Multiples
The first and most challenging meeting for a broker and a seller is the discussion on valuation. No doubt someone has given an opinion and as to my first paragraph often times the opinion givers have no clue or basis for the opinion given. This chart shows the delta between the list price and sold price on deals. It may appear on the surface that its ok to overprice but in a world that is so interconnected and moves so fast overpricing your business can impact the chances of sale. And the larger you are the more important it is to not overprice. You see at the larger levels most buyers seek financing and financing means a banking partner who has their own balance sheet and often if publicly traded are watching their lending practices and decision relative to their own performance (hence why you use small banks not big ones). The lesson here is if you hire a experienced broker who is competent.
Data Point 3: Overpricing
How long will it take to sell? Well if you overprice because “you do not have to sell” or your are “not desperate” you will sit. There are two reasons businesses sit….one your records suck, and tow you over price. The data….45 years worth says if you overprice it will not sell. Period, Thats it….its not the broker, its not the business its the simple fact you as a seller (who is not experienced in selling businesses, not aware of the market demands) made a decision to overprice. So review the comps, live in reality and sell. Or do not cause the choice to overprice will have your business sit…and like a fish at the market when it sits it will start to stink.
Data point 4: List price to SDE
Multiples are not static (with few exceptions) They move up and down with the amount of profit you produce. Your assets, Rules of Thumb (exist in rumor land….the data doesn’t back it up). Here is the deal…barring out of arms length factors (like immigration deals where desire is non economic and viability for a visa drives scarcity and hence price) the more cash flow available the more leverage from lenders can be applied. That is why bigger deals get bigger multiples. You are not getting 7X on a 1.5X business.
We have more data points to share and will gladly walk you through them and relate them to your circumstance. Get educated, or hire experienced professionals. Hiring one not skilled in this space is a massive error and the outcome will not be good.
Michael Shea is the leading broker with TRANSWORLD BUSINESS ADVISORS. With over 370 transactions sold he has sold more companies than anyone in the firm. Consults are free of charge and we can be reached at 321-287-0349 or email at mike@tworld.com .