Welcome to the October edition of our newsletter. According to the preliminary quarterly data pulled from the PitchBook Platform, private equity and venture capital investment declined during the summer quarter. Private equity deal-making registered its third consecutive quarterly drop. Energy and Information Technology were the only exceptions for the quarter, as both saw modest upticks in investment activity.
All industries are fighting the wave of uncertainty coming from the upcoming elections, the tentative economic recovery, and potential changes to the tax code. Look for final numbers and a more detailed analysis of recent deal flow soon.
If you know anyone who is thinking about buying or selling a business, we would be glad to assist them. Your referrals are appreciated. Sincerely,
 John Austin & Bob Dale
Austin Dale Group, Inc.
512-327-0427
info@austindalegroup.com
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How Long Does It Take to Sell?
Surveys indicate that it takes at least 9 to 18 months to sell most businesses in today's market. This is longer than it took years ago. One might ask the obvious question - why? Interestingly, M&A intermediaries and business brokers spend a lot more time working with a business owner on setting a go-to-market price than in years past. So if businesses are priced better than in the past it would seem that businesses would sell faster.
Here are some reasons why they don't:
- Buyers (and sellers) are better educated and informed in the business buying (and selling) process.
- Today's buyer is more concerned with the financial records than in previous years. Yesterday's buyer was more concerned with the business itself.
- Buyers and sellers in today's market rely more on outside advisors.
- Buyers want more information about the seller's business.
- There has been an increase in government regulations
- The sale of a business today is more dependent on outside financing. Yesterday's sale was dependent on seller financing.
- Today's buyers are more reluctant to make that leap of faith necessary to go into business for themselves.
It is helpful for sellers to have reasonable expectations about the process and they should also understand how their willingness to offer seller financing and their own motivation (or lack of motivation) to sell affects the timing.
A business intermediary is a great asset in moving the business transaction process along in a number of ways. Intermediaries help sellers evaluate if they really want to sell, educate sellers on what information buyers will want to see regarding their businesses, weed out buyers who are not ready or able to buy a business, and much more.
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Business Valuation, Business Pricing
Following are a number of truths for buyers and sellers to keep in mind related to business pricing and business valuation.
- All business valuations are merely opinions, not fact. The ultimate value is determined by the marketplace.
- The terms and conditions can dramatically influence price. Seller financing, representations and warranties, non-compete clauses, favorable contracts, etc. - all can be important value adders.
- Value is almost always in the eyes of a beholder. The same business will have a different value based on the needs and requirements of the particular potential buyer.
- Supply and demand changes constantly influence value and price.
- Value can depend on the experience, education and thoroughness of the appraiser.
- Business valuations are too often based just on history and not on the future. Buyers are buying a future income stream.
- The reality is that businesses are bought and sold by human beings - enough said!
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Business Valuation, Business Pricing -- A Bit of Reality
- Keep in mind that all business valuations are merely opinions, not fact. The ultimate value is determined by the marketplace.
- The terms and conditions can dramatically influence price. Seller financing, representations and warranties, non-compete clauses, favorable contracts, etc. - all can be important value adders.
- Value is almost always in the eyes of a beholder. The same business will have a different value based on the needs and requirements of the particular potential buyer.
- Supply and demand changes constantly influence value and price.
- Value can depend on the experience, education and thoroughness of the appraiser.
- Business valuations are too often based just on history and not on the future. Buyers are buying a future income stream.
- The reality is that businesses are bought and sold by human beings - enough said!
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A Glimpse into the 2nd Quarter 2012 Pratt's StatsŪ Private Deal Update
The Pratt's StatsŪ Private Deal Update (PDU) is a quarterly publication that analyzes private company acquisitions by private buyers utilizing the Pratt's StatsŪ database. It provides general trend information on valuation multiples and profit margins (not shown below) for transactions within the Pratt's Stats database. It also includes an excerpt on economic trends from the Economic Outlook Update, published by Business Valuation Resources (BVR).
The below table, from the 2nd Quarter 2012 Pratt's Stats Private Deal Update, presents the median Selling Price/Net Sales valuation multiple based on major industry groups, as identified by SIC code. The general trend shows higher valuation multiples in the early part of the 2000s, typically peaking in 2006-2007, then a reduction in valuation multiples to a low point in 2009, rebounding somewhat in 2010 and then reducing slightly in 2011.
Pratt's StatsŪ Median Selling Price/Net Sales
By Industry for all Net Sales Ranges
| Industry | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | | Construction | 0.32 | 0.34 | 0.43 | 0.38 | 0.42 | 0.39 | 0.39 | 0.34 | 0.33 | | Manufacturing | 0.58 | 0.66 | 0.61 | 0.61 | 0.58 | 0.53 | 0.57 | 0.58 | 0.5 | | Transportation, Communications, Electric, Gas & Sanitary | 0.44 | 0.51 | 0.55 | 0.68 | 0.62 | 0.69 | 0.43 | 0.58 | 0.6 | | Wholesale Trade | 0.35 | 0.41 | 0.42 | 0.4 | 0.42 | 0.46 | 0.47 | 0.48 | 0.43 | | Retail Trade | 0.34 | 0.38 | 0.4 | 0.42 | 0.39 | 0.36 | 0.33 | 0.34 | 0.31 | | Services | 0.61 | 0.59 | 0.57 | 0.57 | 0.58 | 0.56 | 0.53 | 0.57 | 0.55 | | All Industries | 0.46 | 0.47 | 0.47 | 0.49 | 0.48 | 0.46 | 0.44 | 0.46 | 0.45 |
Note: Each data point in this chart was based on a minimum of 10 transactions by private buyers of private companies. Pratt's Stats also includes acquisitions by public buyers, but that data is not included here.
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Austin Dale Group Services
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Next Webinar
"10 Steps to Prepare and Sell Your Business" Date: October 17 Time: 11 AM Central
Selling your business may be the most important business decision you'll ever make. A strategic approach and a little planning can help you maximize your value and minimize risks during the process. Even if you're not prepared to sell now, understanding the process and key success factors will prepare you for the future. Of course every business and every sale is different, but there are some common processes and techniques. Learn many of these essential principles and best practices by attending this presentation by the M&A team at Austin Dale Group.
Click to register, seating is limited:
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Special Event - By Invitation Only
"Built to Sell" Presentation John Warrillow, the bestselling author of Built to Sell: Creating a Business That Can Thrive Without You, will lead a one-hour presentation on building a sellable business. Built to Sell was ranked by both Inc. and Fortune Magazine as one of the best business books of 2011. During this unique session, John will discuss the principles of increasing the value of your company - John will also take your questions directly.
Date: October 25 Time: 10 AM Central This private session requires an invitation in order to attend. If you are a business owner and would like to attend, please contact Austin Dale Group via email at bdale@austindalegroup.com or by phone at 512-327-0427 to request an invitation. |
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Prevention is Better than Cure
To grow a valuable business - one you can sell - you need to set up your company so that it is no longer reliant on you.
This can be easier said than done, especially when, like a PR consultant or plumber, what you are selling is your expertise.
To scale up a knowledge-based business, you first have to figure out how to impart your knowledge to your employees, so that they can deliver the goods. However it can be difficult to condense years of school and on-the-job learning into a few weeks of employee training. The more specialized your knowledge, the harder it is to hand off work to juniors.
The key to scaling up a service business can often be found by offering the service that prevents customers from having to call you in the first place. You have to shift from selling the cure to selling the prevention.
Fixing what is broken is typically a hard task to teach; however, preventing things from breaking in the first place can be easier to train others to do.
For example, it takes years for a dentist to acquire the education and experience to successfully complete a root canal, but it's relatively easy to train a hygienist to perform a regularly scheduled cleaning.
It's almost effortless for a real estate manager to hire someone to clean the eaves trough once a month, but repairing the flooded basement caused by the clogged gutters can be quite complex.
For a master car mechanic, overhauling an engine that has seized up takes years of training, but preventing the problem by regularly changing a customer's oil is something a high school student can be taught to do.
For an IT services company, restoring a customer's network after a virus has invaded often takes the know-how of the boss, but preventing the virus by installing and monitoring the latest software patches is something a junior can easily be trained to do.
When you're selling your expertise, it can be tough to hire a team to do the work for you. As ironic as it sounds, sometimes the key to getting out of doing the work is to offer a preventive service, which not only maintains your business income, but also eliminates the need for someone to call you in the first place.
Click here to learn more: http://www.austindalegroup.com/sellability-score.aspx
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Contact us:
Austin Dale Group
P.O. Box 162727
Austin, Texas 78716-2727
512-327-0427 info@austindalegroup.com
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