Each quarter the International Business Brokers Association in conjunction with the Pepperdine School of Business and the Pepperdine Private Capital Markets Project, survey professionals to understand the trends in private business sale transactions. Below are some highlights of this report from the First Quarter of 2018 Market Pulse Report that we hope you will find useful.
“Rising interest rates may spur activity in the short-term, as buyers are motivated to take on debt before financing becomes more expensive. As interest rates move up, purchase prices may be subdued, despite an otherwise strong market.”
The median multiple of earnings paid for closed transactions in the First Quarter of 2018 is as follows:
Deal Size Median Multiple Paid (SDE)
<$500k2.0 2.0
$500k-$1MM 2.8
$1MM-$2MM 3.3
It is important to note that buyers on deals under $2MM are paying a multiple of SDE or Seller’s Discretionary Earnings. These are the earnings of the business for a single working owner-operator and include their salary and perks. These multiples typically include inventory, but no cash or accounts receivable are part of the transferring assets. Therefore, buyers are required to invest additional monies for working capital.
Deal Size Median Multiple Paid (EBITDA)
2MM-$5MM 4.4
$5MM-$50MM 6.1
Larger deals are reported typically as a multiple of EBITDA, which is a fully managed company paying the owner/manager the industry standard compensation package for their size and type of business. EBITDA multiples on these lower middle market deals typically include a normal level of working capital and of course inventory.
In general, the market has remained fairly consistent with SDE multiples on main street transactions between 2-3 and EBITDA multiples for lower middle market transactions between 4-6.