Market Pulse Quarterly Report Shows 2015 Ended With Strong Sales of Businesses and Optimism is Growing for 2016
The quarterly Market Pulse Survey published by the International Business Brokers Association (IBBA), M&A Source and the Pepperdine Private Capital Market Project showed that business sales remained strong in 2015 especially in the Main Street market. The Main Street market generally refers to smaller commercial establishments, so named because many are found in towns across the United States.
The Small Business Administration had a record year distributing more than $23.6 billion in loans in FY 2015. There was also significant private capital and traditional lending for the Main Street market in 2015 as 71 percent of Market Pulse study respondents who closed deals under $2MM in value reported that the businesses utilized financing other than SBA funds.
The SBA record year coupled with the traditional lending demonstrates how incredibly active for the Main Street market was in 2015.
The Q4 2015 survey which compares the conditions for businesses being sold in Main Street (values $0-$2MM) and the Lower Middle Market (values $2MM -$50MM) was completed by 348 business brokers and M&A advisors representing 38 states. Respondents completed 410 transactions in the 4th quarter of 2015.
The Market Pulse Survey showed that in Q4 2015 deals took longer to close across all sectors. Closing times nearly doubled in the Main Street market, while the Lower Middle Market also saw jumps of up to four months. New this survey, advisors reported on the average time for deals to move from letter of intent (LOI) or offer to closing. In every sector except the smallest, deals took three months to close after a signed LOI.
“Typically the larger the deal, the longer it takes to close,” says Craig Everett, PhD, director of the Pepperdine Private Capital Markets Project. “But the lower middle market has a large number of active buyers, and one way buyers win deals is to show they can close more quickly. As more buyers come to the table, advisors are able to run a more efficient process.”
Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less.
“Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” added (your last name). “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015) whereas in the lower middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”
Additional Key Findings:
- Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the Lower Middle Market.
- Main Street businesses sold for approximately 91 percent of their asking price in Q4 2015. By comparison, Lower Middle Market businesses—which typically aren’t marketed with an asking price—received 99.5 percent of the internal benchmark set by the advisor and seller.
- In the smallest deal category (businesses valued at <$500K) first time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5MM to $50MM) private equity made up the largest buyer group. PE groups were not active at all in the <$500K segment, while individual buyers accounted for only 14 percent (7 percent first time buyers, 7 percent repeat owners) of the larger sector.
- Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the Lower Middle Market as well. Manufacturing companies led the Lower Middle Market.
About International Business Brokers Association (IBBA) and the M&A Source
Founded in 1983, IBBA is the largest non-profit association specifically formed to meet the needs of people and firms engaged in various aspects of business brokerage, and mergers and acquisitions. The IBBA is a trade association of business brokers providing education, conferences, professional designations and networking opportunities. For more information about IBBA, visit the website at www.ibba.org.
Founded in 1991, the M&A Source promotes professional development of merger and acquisition professionals so that they may better serve their clients’ needs, and maximize public awareness of professional intermediary services available for middle market merger and acquisition transactions. For more information about the M&A Source visit www.masource.org.
About the Pepperdine University Graziadio School for Business and Management
A leader in cultivating entrepreneurship and digital innovation, the Pepperdine University Graziadio School of Business and Management focuses on the real-world application of MBA-level business concepts. The Graziadio School provides student-focused, globally-oriented education through part-time, full-time, and executive MBA programs at our eight California campuses, as well as through online and hybrid formats. In addition, the Graziadio School offers a variety of master of science programs, a bachelor of science in management degree-completion program, and the Presidents and Key Executives MBA, as well as executive education certificate programs. Follow the Graziadio School on Facebook, Twitter at @GraziadioSchool , and LinkedIn.
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6 Power Ratios to Track Before Selling Your Business
Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth, but by the infant mortality rate – a ratio of the number of births to deaths.
Similarly, baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base – as a percentage of the number of times they get the chance to try.
Acquirers also like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they will become with the idea of buying your business.
Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.
If you’re planning to sell your business one day, here’s a list of six power ratios to start tracking in your business now:
- Employees per square foot
By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.
- Ratio of promoters and detractors
Fred Reichheld and his colleagues at Bain & Company and Satmetrix developed the Net Promoter Score® methodology.[1] It is based on asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question, “On a scale of 0 to 10, how likely are you to recommend <insert your company name> to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10, and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a score of 0 to 6. Then calculate your Net Promoter Score (NPS) by subtracting your percentage of detractors from your percentage of promoters.
The average company in the United States has a NPS of between 10 and 15 percent. Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.
- Sales per square foot
By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.
- Revenue per employee
Payroll is the number one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. Google, for example, enjoyed a revenue per employee of more than one million dollars in 2015, whereas a more traditional people-dependent company may struggle to surpass $100,000 per employee.
- Customers per account manager
How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts, and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.
- Prospects per visitor
What proportion of your website’s visitors “opt-in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony on how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.
Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes.
[1] Net Promoter, Net Promoter Score, and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Read MoreWarning Signs A Business Owner May Be Experiencing Burnout
Burnout can come with a business that’s successful as well as with one that’s failing to grow. The right time to sell is before the syndrome becomes a threat to the effective management of a business. What are the warning signs a business owner may be experiencing burnout?
• That isolated feeling. The burnt-out owner has been “chief cook and bottle washer” for such an extended period of time that even routine acts of decision-making and action-taking seem like Sisyphean tasks. These owners have been shouldering the burdens alone too long.
• Fuzzy perspective. Burnt-out owners are so close to their work that they lose perspective. Prioritizing becomes a major daily challenge, and problem-solving sometimes goes no further than the application of business Band-Aids that cost money in the long run rather than increase profits.
• No more fun. Of course, owning a business is hard work, but it should also include an element of enjoyment. The owner who drags himself or herself through every day, with a sense of dread – or boredom – should consider moving on to a fresh challenge elsewhere.
• Just plain tired. Simply put, many business owners burn out from the demands placed on them to keep their companies operating day after day, year after year. The schedule is not for everyone; in fact, statistics show that it’s hardly for anyone, long-term.
The important point here is for business owners to recognize the signs and take action before burnout begins to hinder the growth – or sheer survival – of the business. Many of today’s independent business owners feel they’ve worked hard, made their money and sense that now is a good time to “cash-out” and move on. The time to sell a business is before burnout set’s in as overall results tend to be much better than after.
© Copyright 2015 Business Brokerage Press, Inc.
Read MoreBusiness Sales Shifting to a Seller’s Market Q3 2015
The 2015 3rd Quarter IBBA and M&A Source Market Pulse Survey is out with some interesting findings. “This quarter’s report continues to see the pendulum shift to a seller’s market across all deal sizes. While buyers still hold the upper percentage for transactions valued at $1 million or less, the percentage is shrinking.”
Below are a few highlights from the report:
- Companies with strong earnings and good accounting and management records are wanted.
- Buyers are increasingly market educated and therefore know about more opportunities that are coming to market. They remain patient, but ready to act when a strong company is on the market.
- Retirement remained the leading reason that business owners went to market, which is understandable since baby boomers continue to retire in increasing numbers.
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The casual reader of this information might assume there was a stronger shift to a buyer’s market as the quantity shifts; however, the findings indicate that the market is slowly becoming a sellers’ market especially as transactions increase in size.
- Business owners who are selling now are ‘ahead of the curve’ and are getting rewarded with very strong valuations. Eventually, as more and more baby boomers seek to retire and put their business on the market, there will be an oversupply of sellers and the market will most likely swing back to a ‘buyer’s market.
- The majority of small business buyers (under $1 million deal size) made the acquisition to ‘buy a job’. Typically, these buyers are already employed and are looking for a compelling reason to leave that security and run a business of their own. The buyers of larger businesses, on the other hand, are making synergistic purchases to add depth to their existing business.
- An increasing number of existing business owners are expanding through acquisition and want to thoroughly compare the potential acquisition against their current company. Since these buyers want to understand the ability to integrate the company into their own, they expect timely and accurate information to make these decisions.
Click here to download the full report summary.
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Start Planning Your Exit Strategy
Business owners are often asked, “Do you think you will ever sell your business?” The answers vary from: “Only when I can get my price” to “Never” to a realistic “I don’t really know” with everything else in between. “When will you sell your business?” is often asked, but very seldom answered. Certainly, misfortune can force the decision, but no one can predict this event. Most don’t believe or accept the old expression that advises, “It is always a good idea to sell your horse before it dies.”
There is an also an old adage that says: “You should start planning on exiting your business the day you buy or start one.” You can’t predict misfortune, but you can plan on it. Unfortunately, most sellers wait until they wake up one morning, and just drive around the block several times working up the courage to begin the day working in their business. This is a common sign of “burn-out” and is an-going problem with small business owners. Or, they face family pressure to start “taking it easy,” or to move closer to the grandkids. Now what?
There are really only four ways to leave your business. Obviously, the easiest is to put the key in the door and walk away. It’s also the worst way! The years of hard work building a business has a value. Another way is to transfer ownership to one’s children or child. Assuming one of them is interested and capable, it can mean a successful transfer and a possible income stream. A third way is to sell it to an employee. The employee may know the business, but may lack the interest or skill for ownership or the funds necessary to pay for it. The fourth way, and the one taken by the majority of small business owners, is to sell it and move on. Every business owner wants as much money as possible when selling, so now may be a good time to begin a pre-exit or pre-sale strategy. Here are a few things to consider when you start planning your exit strategy.
Buyers want cash flow.
Buyers are usually buying a business with a cash flow that will allow them to make a living and pay off the business, assuming it is financed – and most are. Buyers will look at excess compensation to employees and family members. They will also consider such non-cash items as depreciation and amortization. Interest expenses along with owner perks such as auto expense, life insurance, etc., will also be considered. A professional business broker is a good source of advice in these matters.
Appearances do count.
Prior to going to market, make sure the business is “spiffed up”. Do all of the signs light up properly at night? Replace carpet if worn; paint the place and replace that old worn-out piece of equipment that doesn’t work anyway. If something is not included in the sale – like the picture of Grandfather Charlie who founded the business – remove it. An attractive business will sell for much more than a tired and worn-out looking place.
Everything has value.
Such items as customer lists, secret recipes, customized software, good employees and other off-balance sheet items have significant value. They may not be included in a valuation, but when it comes time to sell, they can add real value to a buyer.
Eliminate the Surprises.
No one likes surprises, most of all, prospective buyers. Review every facet of your business and remedy any problems, whether legal, financial, governmental, etc., prior to placing your business up for sale.
Your professional business broker can assist in all facets of preparation. They know what buyers are looking for and they also are familiar with current market conditions
Read MoreWhen to Sell Your Business: Capitalizing on the Business Life Cycle
If you’re a business owner, you know the dream; buy or start a business, work hard to develop it, and watch it grow into something you’re proud of.
Then, once the business runs smoothly without your constant input or you’ve found someone you trust to manage it, you’ll finally be able to enjoy the freedom that comes with being your own boss! When you’re finally ready to retire or move on, you’ll sell your business and the profits from the sale will fund your retirement, provide a down payment on your next business purchase…
But there’s a problem with this way of thinking. By not taking into account the natural life cycle of a business, you can rob yourself of that nice payout…or even worse not be able to sell at all.
The Life Cycle of a Business
All businesses have a life cycle – they grow, mature, and eventually decline or re-invent themselves. How long this cycle takes depends on the structure of the company and the owner(s), but at some point all companies go through the following stages:
GROWTH STAGE: During the growth stage, the owner(s) are infusing the business with energy, ideas, and money. There are new procedures, products, and customers, and often new employees and suppliers. Profits start out low but keep rising, improving the value of the company.
MATURITY/STABILIZATION STAGE: This is where the owner(s), and the business, naturally reach a leveling-off point. The owner(s) have reached the limit of what they can do to grow the business. This can happen for any number of reasons: market saturation, competition, a changing customer base or sometimes simply the owner(s) wanting to work less. Whatever the cause, the maturity stage marks a period of stability and predictable day-to-day operations.
FORK IN THE ROAD: RE-POSITION OR DECLINE
DECLINE STAGE: The business enters a decline phase as the owner begins to back away from the business. This usually happens because they lose interest, start retirement, are burned out, face financial difficulty, or experience health issues. At this stage, when the business loses ground there’s no big effort to bring it back. No one is actively trying to recover lost customers or investing in updated equipment. After all, the plan is to sell, so why keep putting money into it?
OR….
RE-POSITION STAGE: If the owner has the energy, desire and capital they must think about the business as a “start-up”. The product/service, marketing and procedures are modified to meet the changing market conditions. The “former” business is history, the “new” business is now back in the Growth Stage…requiring a roll up the sleeves mentality. The thing that gets most businesses in trouble when they decide to go through the Re-Position stage is the difficulty in looking at the business with a fresh perspective (“hard to see the forest through the tree’s”).
Why Selling Your Business at the Wrong Time Devalues Your Business
As you can see from the above scenario, many business owners sell during the DECLINE phase, when the value is actually at its lowest! And while the owner still sees the worth of the business based on the work and money they invested in the past, a potential buyer only sees dropping sales, poor customer retention, and outdated equipment.
That’s why the longer it takes to finally make the sale, the more money you lose. Because once your business is in the decline phase, you’re faced with a difficult decision: selling it at a reduced price because it’s no longer a growing or stable business, or investing money and effort to “bring it up to speed” and make it more attractive to buyers. Either way, you pay (with time, money & energy).
How to Use the Business Life Cycle to Your Advantage
How do you avoid ending up in this difficult position? By selling your business when it’s at its prime (during the growth or maturity stage), or being prepared for the sale way ahead of time.
Many business owners have made enormous profits by selling their business in the growth stage (think start-ups that were acquired by major companies). You can also make a healthy profit from a mature business that’s showing consistent profits and stable operations.
If this sounds appealing to you and you’re comfortable selling your business at this stage, it’s wise to get the process started as soon as possible. Doing the groundwork early makes you prepared to accept a great opportunity or to sell quickly if your circumstances change (more on this in a future post).
If you’d rather be involved with your business right up until you retire, you can still see good profits as long as you plan ahead.
There are actually many ways you can run your business with transferred or shared ownership that lets you exit in stages rather than all at once. It requires planning well in advance, and understanding how to structure the deal but these options can let you retire at your own pace and still make a significant profit.
Whichever way you decide to go, knowing how to identify each stage of a businesses’ life cycle and pre-planning your exit strategy to meet your long-term needs are the keys to making sure you get back more from your business than you put into it.
If you’re interested in learning about your selling options, getting a professional business valuation, or getting help creating an exit strategy, please feel free to give Evolution Advisors a call at 916.993.5433 or visit our website: www.EvoBizSales.com
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