What Businesses Sold for in 2014
Insights from Alex Shteriev, Managing Director & Partner for Beacon Brokerage
As an eventful 2014 was closed last quarter, I wanted to take the time to reflect and make sense of what happened in the busiest year for me to date, both in terms of the numbers well as total value of transactions. While this sounds like a fairy tale ending to a great year, 2014 was anything but.
Timing is (Not) of the Essence
Looking at transactions in 2014, compared to previous years, a couple of facts stand out. The average Due Diligence period almost doubled, standing at an astounding 150 days (just shy of 5 months), compared to an average of just over 90 days for transactions I have completed in the previous 5 years. In 2014, for a number of transactions this period was extended due to the financial institutions backing the deal requiring more time, and on a few occasions more thorough information. However, not only were the banks more cautious, Buyers did not seem to be in a hurry either, it seemed like everybody preferred this prolonged period of “dating” the Seller. Whether that would make for better “marriages”, only time will tell.
Priced to Sell
Ever since the beginning of the financial crisis in 2009, the issue preventing higher transaction volume among small to medium size businesses, has been the unreasonable valuation and price expectations of business owners. It appears that in 2014 we have started seeing more reasonable business valuations, as well as business owners willing to listen to their broker, but more importantly to the voice of the market. This has been reflected in transactions in 2014 selling for an average of 92% of their asking price, compared to businesses selling for 84% of asking during the previous five years. What is more, a number of full asking price LOI’s (Letter of intent) were signed, only to get lowered post Due Diligence due to materially significant causes. All in all, it appears like 2014 was the year when we finally had a predominant Price to Sell attitude versus Sell at Certain Price thinking by business owners.
Oh, Those Multiples
As every conversation about buying or selling a business inevitably begins, it focuses and ultimately ends with discussion on Multiples, here is what businesses I represented sold for in 2014. Weighted average EBITDA multiple was 3.13 (with a high of 3.9 and low of 2.9), compared to weighted average of 3.43 for the previous five years. Weighted average SDE multiple (Seller Discretionary Earnings) was 2.29 (with a high of 3.0 and low of 1.6). No surprise there as this modest decline in multiples, compared to previous years, is in line with the aforementioned more reasonable valuations and the dominant Price to Sell sentiment in the market. Share deals versus Asset deals were split exactly as previous years, with 75% of deals being Asset transactions, and 25% Share purchases.
The 2015 (Crystal) Ball Game
Any predictions for the future can only be reasoned as long as they are based on and try to reasonably extrapolate the past. Based on how 2014 transpired and what is the current sentiment in the investment community, financial institutions and among business owners, I expect a balanced buyer-seller market with deals in the small to mid-size business segment executed at about 3.25-3.5 x EBITDA range, with better businesses selling at close to 4 x EBITDA. Also, it will be reasonable to expect Due Diligence periods to drop down closer to their norm of approximately 3-months degustation periods, as well as Asking to Selling Price ratios to remain in the 90th percentile.