THE STATE OF THE SMALL BUSINESS SALES MARKET
Posted on 7, April 2014
in Category blog
The Australian Institute of Business Brokers is the peak industry body representing professional business brokers involved in the sale of businesses across Australia. It surveyed its members regarding the market conditions for selling smaller businesses.
Number of qualified buyers – Coming out of the shadows
The number of qualified buyers is starting to see an uptick with 65% of brokers seeing more qualified buyer interest compared to 27% in the September quarter. It appears that buyers who were lagging the market improvement in the September quarter are emerging. Only 15% of brokers saw a decline in qualified buyer interest, a significant reduction from 45% in the September quarter.
Outlook for business sales – Light at the end of the tunnel – and it is not as train!
In the September quarter, the majority of brokers (54%) indicated that they expect that the market for sale of smaller businesses to improve a little in the December quarter, and 34% say that there will be around the same level of difficulty. The December survey results showed a massive 70% of brokers expect that there will be an improvement in the market for selling business in the March 2014 quarter – this is by far the highest level of optimism in the survey history.
Multiples for businesses sold for less than $250,000 – The buy yourself a job segment
Brokers were surveyed on the multiples of earnings that businesses sold for in the December 2013 quarter. For businesses sold for under $250,000 (excluding real property), the multiple ranges of PEBITDA (Proprietors Earnings before Income Tax, Depreciation and Amortisation) were spread. The most common multiple ranges were 1 to 2 times PEBITDA with 30.3%, followed by 2 to 3 times PEBITDA at 24.2% and less than 1.0 PEBITDA at 22.7%. Just under a quarter of businesses (22.8%) sold at a rather high PEBITDA multiples of 3 and above.
Multiples for businesses sold between $250,000-$1,000,000 – The mainstream small business segment
For businesses sold between $250,000-$1,000,000, the multiple ranges of PEBITDA were spread with the most common multiple ranges were 2 to 3 times PEBITDA with 28.6%, followed by 1 to 2 times PEBITDA at 25.4% and 3 to 4 times PEBITDA at 20.6%. The increase in multiples for more substantial small businesses was expected.
Multiples for businesses sold between $1.0-$4.0 million – The elite small business segment
As the size and value of businesses increase, the basis of their valuation typically changes from an earnings figure before the owner’s salary (PEBITDA) to an earnings after market based remuneration to owners. The survey used Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). The most common multiple ranges were 2 to 3 times EBITDA with 34.5%, followed by 3 to 4 times EBITDA at 20.7%.
We see too many times inexperienced owners and their advisers confusing the earnings figure on which to value their business. An AIBB member is well across these issues. The survey results also highlight the danger of simply applying the same multiple to business of a certain size without considering their growth potential and risk.