Here’s what it means to business owners
Over the last 41 years, Transworld Business Advisors have been helping business sellers and buyers find a connection. Over time, CEO Andy Cagnetta and his team have refined processes and developed broker talent. The result is the largest small business brokerage firm in the world.
They’ve also quietly been doing something else- collecting data from their nearly 800 brokers responsible for thousands of deals.
While the findings from this one company do not represent the entire industry, it is a considerable sample size considering there are more data entry points than any other available source.
Average List Price
Seller Discretionary Earnings is a term that describes the total benefit an owner receives in his business. While there are other ways to determine value, SDE remains the most popular for small to medium-sized businesses (SMBs).
This graphic shows a linear relationship between SDE and average sold multiples. “We’ve learned over time that as the quality and quantity of earnings increase, so does buyer confidence. That translates to the seller willing to pay more,” says Cagnetta.
One of Transworld’s top brokers, Bianca Evans, adds “Some buyers are looking for a job in their own company. However, others are willing to pay a premium for a scalable business with some infrastructure.”
If you choose to sell or stay and build a bigger business, it will be in your best interest to maximize SDE. “Keep your foot on the gas pedal,” says Evans. However, if you’re aging out and facing retirement or health concerns are causing you to sell now, that may not be an option.
Takeaway: Bigger businesses are more valuable.
List Price vs. Close Price
Unfortunately, some listed businesses will never sell at all. Their owners will turn around and lock the door for the final time. Evans and Cagnetta attribute this partly because of incorrect pricing.
This graphic illustrates the importance of going to market with a fair and defensible price. There is little pricing negotiation that happens if the business is valued correctly. Transworld transactions close at an average of 88% of the listing price.
“Asking for more than the business is worth, thinking that you’re allowing room for negotiation, is rarely a good strategy. The data says you will not be successful. Buyers will pass you by and look for a more market-reasonable business. They won’t even reach out to you to begin a negotiation. People won’t respond to your deal if you’re overpriced,” says Evans.
Cagnetta thinks this is partly because the internet (and access to getting information) is better than ever. Buyers can comparison shop, just like they do with everything else.
Takeaway: Price it right; get it sold
How Long it Takes to Close
The larger the business- the more time it takes to sell. This slide confirms our assumptions. It makes sense because larger firms are more complex. There could be corporations, investors, and a dozen people involved in the process of due diligence. For example, a larger company might hire an outside firm to do a Quality of Earnings study.
Selling any business (particularly a large one) is complicated, with hundreds of moving parts. Tasks must be done and in order; otherwise, your deal can implode. It’s the reason people use business brokers. Brokers only get paid when the deal closes, so they have a shared interest in getting across the finish line. However, deals take time, so plan for it. This is why your broker will ask you to sign an agreement to reflect those timelines.
Takeaway: Have reasonable expectations
Pricing is on the Rise
Multiples have been increasing over the last two years. That’s good news for sellers. Evans offers her reasons. “We’re still emerging from the Covid era. Inventory is down from its peak in 2007, which means simple economics are at work. When there are more buyers than sellers, it creates a competitive situation that drives sale prices up. Covid-resistant businesses are selling quicker and for more money.”
Cagnetta has a similar take. “We think there’s a lot of money on the sideline. Those corporate refugees that took early retirement packages or just didn’t want to return to the office need to get back in the game of earning money. It’s definitely a seller’s market.”
Takeaway: It’s an excellent time to sell
If you want to sell now or a few years down the road, it’s never too early to develop a relationship with a business broker. The right broker is armed with information you can use to your benefit. They know what’s happening on main street and how that impacts your value. They know of comparable businesses that have sold and what pool of buyers are available.
Evans offers a complimentary opinion of value for business owners who want to know what their business is worth today. With no strings attached, it’s a valuable piece of information, even if your motivation is just curiosity.
Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field and has made over 180 transactions since 2006. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.
In her 16 years of experience, she has sold businesses in manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.
She has earned the prestigious million-dollar-plus award among her many accomplishments for 14 consecutive years. She has sold the most (dollars) in North Florida for the past three years.
As part of her process to list a business for sale, she offers free business valuations.
She maintains her professional networks by participating in the International Business Brokers Association (IBBA) and the Business Brokers of Florida (BBF).
One interesting fact about Bianca is that she used to be a business owner herself! She has been on both sides of the transaction when she purchased and later sold that same business. She finds that perspective invaluable when relating to her clients and balancing the many details and emotions.
She is licensed in Georgia and Florida and speaks fluent German.