EP 121: Q2 2024 Deal Stats Report

Ed Mysogland  0:20  
Welcome to another episode of the defenders of business value podcast. I'm your host, Ed mysogland, and today it's that time of the year where the second quarter deal stats value index has rolled out. And so I want to do have a shorter episode, but share some of the the meaningful information for those of you following business valuation, all right, so the first thing we we want to draw your attention to is that EBITDA multiples seem to be returning to typical levels in 2024 now. EBITDA, for those of you new to the business valuation community, EBITDA is earning before interest, taxes, depreciation and amortization. So, so what does it mean? It's returning to typical levels. So at this time over the period that was analyzed, EBITDA multiples across all of the industries were the highest in the third quarter of 2018 and that was at a five, so 5x and has since been trending downward until the second quarter of 2022 so clearly covid had an effect on that. But since then, the EBITDA multiples have been generally trending upward, and now in the first, you know, concluding the first quarter of 2024 we are at 4.3 as a median multiple. Okay, so that's EBITDA multiples. How about net sales, same kind of thing. So in the quarters that were analyzed during this report, the net sales multiple of 54% of the first quarter of 2024 was unchanged from the prior quarter, and since that second quarter of 2020 net sales multiples generally have been increasing according to the three quarter trailing average. This kind of contrasts with the previous declining trend from the second quarter of 2018 to the second quarter of 2020 the lowest multiple recorded since the second quarter of 2018 was 43% of revenue, and that was in the second quarter of 2020 so as far as net sales, you know, you're, you're running roughly, you know, between 50 and 54% of revenue margins. The margins are, are really interesting, because they always tend to be between 11 and 15% and this is no different. So the EBITDA margins declined the first quarter of 2022 but have since trended positively, reaching 15% in the first quarter of 2024 now EBITDA margins were at their highest point in 2023 at 18% and between you and me, I, 18% is a big number for EBITDA. Very few companies that we're seeing selling are running at that maybe at SDE. So that means sellers discretionary earnings, but not often do you see a, you know, an 18% EBITDA margin. Normally it's between the 10 and 15% so, so, and that's where I want to go. The previous range was between 11 and 15% in the first quarter of 2019 through the first quarter of 2021 since the second quarter of 2018 the EBITDA margins have never been below 11% which is good. And again, as the businesses recovered from covid, they should be their EBITDA margins should be improving. All right, let's talk about sectors. It's really interesting. So the all time, EBITDA multiples remain the highest for the information sector. And between you and me, I think this is a little bit misleading, because normally there's not a whole lot of Depreciation or Amortization in the information sector, so that multiple, in this case, 11x that jumps to nearly 18 is a real, real big jump. And again, I think it's, I think it's somewhat misleading, but it for true even, but for. True EBITDA in a in a information sector business. You know that number, that number does make sense. But normally we see those kind of multiples with public companies, all right. So again, we jump from 11 to to 18. The utility sector is at 8.2 let me see what other big jumps we have. Meanwhile, the low tends to be an accommodation and food service. So the hospitality industry is a 2x but the median across all industries is still running roughly between 4.1 and 4.3 okay, the EBITDA multiples for private and public sector transactions, so meaning private buyer, buying, public seller. The multiples are are have decreased. So the EBITDA multiples for private buyer transactions, which involves a public seller have decreased from 13.2x to 8.8 now. And to be honest with you, I have no idea why that is the case my I suspect it's it has more to do with urgency of sale, as opposed and raising capital than it is, than it is any anything else. So net sales multiples have declined. You know, most notably, all right, so transactions across all buyer types have seen a notable decrease which and which is kind of conflicts with the EBITDA multiple is is trending upward. So the the decrease in the net sales multiple in 2023 compared to 2022 with exception of private buyer buying private seller, which had a modest 2% increase, you know, the, you know, it tends to be the multiples for the private buyer transaction involving a public seller, had the largest decrease in in declining from 2.03 to 1.45x of and again, this is, this is revenue. And it's really interesting. Again, you most so and when I'm talking about this, this the sales multiples. I'm talking, you know, private buyer buying public sellers, public buyers buying private sellers, public buyers buying public sellers. And then private buyers, buying private sellers. Those are the what we're what we're looking at. It's just, it just differs. But the and I'll have links to this, to these graphs in in the show notes, but you can see that everything is trending downward as far as, as using sales as the proxy for value. All right, pricing multiples and profit margins are somewhat positive. Minnesota discussion, earnings multiples were positive in 2024 for the companies up to a million in sales, as well as those between one and 5 million, the EBITDA multiples have increased for companies in size ranges, except for the smaller companies, up to 1 million in sales. And then lastly, the profit margins for companies across all sizes have generally been decreasing in 2024 I can tell you, I have not seen that, but where we're based, out of Indiana, that's not totally atypical. It takes. Seems as though some things that happen on the coast takes a little bit of time to trickle to us. So all right, let me see what else I can share with you the 10 year trend for private sellers.

Ed Mysogland  9:06  
All right, so the net sales multiple decreased nine out of the 15 sectors in 2023 the sectors that saw a significant decrease in in net sales was information and finance. But like I said a minute ago, the EBITDA multiples were trending upward. So where I'm heading with this is that the these, this data seems to be contradicting itself. I i tend to focus more on if I could, if I could focus on revenue, a revenue multiple tends to be a better proxy for value, and I say that, and let me just give you an example, like for example, we valuing hospitality companies for sale. You know how they choose to report in? Come and and and operating expenses and who all's on the payroll? You know it. It varies across the board. The biggest thing for us, what tends to always be the case is that the revenue happens to always be. No one understates revenue. Lots of people understate profitability, so that's why we tend to focus on the on the revenue. But again, and this is always the case, revenue, revenue may get you the the value, but you need earnings in order to pay for it, and if you don't have the earnings, chances are the business won't be sold, or you're going to have to structure it in a manner to to offset some of the shortcomings of the earnings. All right, so back to our 10 year trend. So the the seller's discretionary earnings multiples have increased in seven of the 15 sectors in 2023 and those again, the SDE multiple, you know, jumped roughly 22% from 23 to this most recent quarter, the EBITDA. Multiples have been trending positively across most sectors. But again there, if you look at them as a whole, there's not a whole lot of volatility as you as you examine all, you know, all industries, they just it. There's just not as much volatility as one might think. All right, so as we and again, I will share these, these multiples and some of these graphs that I'm working from. So the last thing I wanted to share with you is the discounts. So the second half of 23 showed typical discount levels. And what that means is, you know, throughout the process, I mean, you put you have a bid and ask price, so that through the negotiation process between buyers and sellers, in which both asking prices and sale prices continue to fluctuate, there normally is a little bit of a delta between ask bid and ask price, so what the seller is likely to sell has been effectual. Effectively been different than the original asking price, and it normally is, and this has to do with the economy, as well as buyers, assessment, financial conditions, industry comparables, return on investment, and the goodwill worth of the business as a going concern. So the largest discount recorded was the second half of 2017 to the first half of 2023 which was 23% discount, and that has, you know, again, being in the deal industry, and knowing some of the people, some of the players out there, the lack of understanding valuation and how a buyer sees it is probably the best way to say it is that, You know, if you have a $5 million business, but the earnings only support three yet you put it out, you put you put it out for $5 million and you sell it for three. Well, let's say, you know, that's a 40% discount. So anyway, the typical discounts range between 16 and 18% all right? And the most recent discount was in the second half of 23 which was about 10% so, so where I'm heading with this is, and by the way, there, there's other services. I'm using deal stats right now, but there's other services, like biz by sell, I mean they tend to they, and I don't know if I believe it or not, but it's, it's really interesting, because it seems as though we're talking, you know, between five, maybe we might get close to 10, but normally it's around 5% bid to ask. I don't know whether that's true or not. I can tell you, like with our practice. I mean, we try to be within that 10% range, and most of the time we are alright. So next, so everybody wants to know, how long does it take to sell a business? So the second half of 23 you know, we're still looking at 211, days, and the second half of to 2020 which is no surprise, it took almost a year. So if I'm a Business seller, I'm considering, you know, what am I going to do for in this case, for the how do I plan? Well, it's going to take look. It's going to take you roughly six months to a year to make the decision that you're going to sell the business. It just, it just, is that? I mean, the sales cycle is super long, and once you get all your ducks in a row again, you're looking at six months to a year. You're looking at nine months to a year to sell. So now you're at between a year and a half and two years, and then you're going to have a transition period afterwards. And that transition period may be a month and it may be a year, or you may even say, You know what, I want to stick with the business. And there's lots of seller or there's a lot there's lots of SBA financing opportunities that will permit you, if you're so inclined, to remain with the business post sale. But again, if I'm a seller right now, considering the sale process, you're you probably need to start best case scenario, you're a year and a half. Worst case scenario, you're probably closer to three years. Okay? Everybody wants to talk about officers compensation. I'll include, I'll include this, as far as you know where what's the number I can tell you that what's the best way to say this that the officer's comp tends to be five to 7% of revenue the way it seems. I'll include this in the show notes. The reason, the reason people want to know the officer's compensation and business valuation is, again, when you buy a company, you're looking at, how much can I pay myself, how much debt can I service, and how much of a return of and all my investment can I get? Those are the three ingredients. And so what does that mean? The reason we share officers compensation data was so you can see, you know, what is what, what is reasonable in your type of industry, and, and again, if you're, you know, you're looking at a company that has a half million dollars in in, you know, in adjusted cash flow, or SDE, And you're sitting here saying, Look, I need $400,000 in order for this to make financial sense. Well, you know, there's nothing wrong with that, but you know, if the industry, the normal officer is paying themselves, pick the number, you know, 200,000 and you're 200,000 over. Well, your valuation, because of the requirements you're putting on, the cash flow will be, will be decreased, and that create, will create a problem for you. So that's why we include the officers compensation, just so you can see, as you're building your your models, whether you're on the sell side or buy side, you can see what's what's reasonable, and from a valuation standpoint, we can figure out what's reasonable so we can adjust your cash flow and hopefully maximize the value. Because you, you may, you may be overpaying yourself, and we can show from an appraisal standpoint that this makes more sense. You know, if you're paying yourself 200,000 rather than 400,000 and then again, that that demonstrates to the buyer. And again, we're talking nor normally, like when you do and the reason we do this, it has more to do with EBITDA multiples, as opposed to seller's discretionary earnings. Sellers discretionary earnings. We in incorporate all of that, so we have, you know, a gross amount of cash flow regardless of what the owner's paying. We want to take all of it and then we can adjust from there. Okay, so where are we? So we are,

Ed Mysogland  19:02  
this was deal stance, this first quarter data, it's, it's always really helpful. Most of the people, you know, the most of the the people that are listening, you know, I get the most feedback on on these types of episodes, if you are, if you need market data, if you want to talk shop about, you know, what's going on the industry, the door is always open. I'm I get calls each and every week from somebody that just wants to just shoot the breeze about what's going on in their industry, what's going on with the multiples. And again, I'm happy to share I've been in practice for 32 years, and sharing information that I have to help you has never gone wrong. So reach out. My contact information is in the show notes, and we look forward to talking to you next week. Bye.