August 2014
In This Issue
M&A Update
10 Common M&A Mistakes to Avoid #3
How to Increase the Value of Your Business by 71%
 
M&A Update

From the Pepperdine Private Capital Markets Report 2014

The Pepperdine Private Cost of Capital Survey is a comprehensive investigation of the major private capital market segments. The latest survey examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, M&A intermediaries, business brokers, limited partners, and business appraisers. Their findings indicate that the cost of capital for privately-held businesses varies significantly by capital type, size, and risk assumed.

Some highlights from the report:
  • The average business sale took 8 to 10 months to complete. Almost 2/3 of transactions were completed between 6 and 12 months after going to market. 
  • M&A professionals report that there is a slight increase in the number of deals, despite the increasing pressure on profit margins for their client companies. 
  • Deal multiples are rising slightly. 
  • The top reasons for deals not closing were valuation gap (26%), unreasonable seller or buyer demand (21%), economic uncertainty (12%), and insufficient cash flow (12%). 
  • 30% of deals terminated without transacting (meaning that 70% of deals on the market were successfully closed).
  • Most active industries for M&A transactions:
    • Manufacturing - 20% of deals
    • Business services - 17%
    • Consumer goods & services - 12%
    • Financial services & real estate - 10%
    • Information technology - 9%
    • Health care & biotech - 8%
  • 56% of transactions involved strategic buyers, 44% involved financial buyers 
  • 71% of respondents saw price premiums paid by strategic buyers over financial buyers. 29% of respondents did not see any premium paid by strategic buyers.  The most common price premium is in the range of 1% to 20%. 
  • There is a shortage of capital for those companies with less than $10 million in EBITDA, but a surplus for companies with $10 million in EBITDA or more. 
  • The most popular valuation methods used by respondents when valuing privately-held businesses were discounted future earnings, comparable company transactions, and capitalization of earnings.
  • The average weighting of various multiples to determine the value of a privately-held business were recast (adjusted) EBITDA multiple (58% weight), revenue multiple (13% weight) and unadjusted EBITDA (10% weight).
  • The average EBITDA deal multiple for all industries ranged from 4.2X (for companies with less than $1 million EBITDA) to 5.7X (for companies with up to $10 million EBITDA);  IT and other tech company multiples were slightly higher.
  • Required rates of returns for different types of lenders or investors:
    • Banks 3.5% to 5.5%
    • Asset-based lenders 6.1% to 8.3%
    • Mezzanine lenders 8.5% to 21%
    • Private equity groups 19.2% to 28.3%
    • Venture capitalists 22.5% to 27.5%
    • Angel investors 25% to 30%
 
  

Welcome to our August newsletter.  In this issue we share some interesting findings from a recent Pepperdine University study on business sales and valuations. Our feature article describes the correlation between the Sellability Score and increasing the value of your business (71% on average!). We also have part 3 in our blog series "10 Common M&A Mistakes".

Summer will soon be winding down and that means that our Fall Webinar Series is around the corner.  Click here to view or register for upcoming events.

 

Austin Dale Group is an M&A advisory firm that specializes in technology companies. We welcome your inquiries and appreciate your referrals. 

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Bob Dale & John Austin
512-327-0427

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10 Common M&A Mistakes to Avoid
#3 of 10

In this blog series I'm describing ten common mistakes that we've seen in the M&A deal process. Every entrepreneur or executive who decides to buy or sell a company should avoid these common mistakes to increase their chances for success....[Click here to read entire blog]

How to Increase the Value of Your Business by 71%


 

How much did your home increase in value last year?  Depending on where you live, it may have gone up by 5% or 10% or more.


How much did your stock portfolio increase over the last 12 months? By way of a benchmark, The Dow Jones Industrial Average has increased by around 13% in the last year. Did your portfolio do as well? 

Now consider what portion of your wealth is tied to the stock or housing market, and compare that to the equity you have tied up in your business. If you're like most owners, the majority of your wealth is tied up in your company. Increasing the value of your largest asset can have a much faster impact on your overall financial picture than a bump in the stock market or the value of your home.

 

Let us introduce you to a statistically proven way to increase the value of your company by as much as 71%.  Through an analysis of 6,955 businesses, the people at The Sellability Score have discovered that companies that achieve a Sellability Score of 80+ out of a possible 100 receive offers to buy their business that are 71% higher than what the average company receives.
 
How long would it take your stock portfolio or home to go up by 71%? Years - maybe even decades. Get your Sellability Score now and you will be able to track your overall score along with your performance on the eight key drivers of Sellability. Like a pilot working his instrument panel, you can quickly zero in on which of the eight drivers is dragging down your value the most and then take corrective action.
 
Your overall Sellability Score is derived from your performance on the eight attributes that drive the value of your company:


 

  1. Financial Performance:  your history of producing revenue and profit combined with the professionalism of your record keeping.  
  2. Growth Potential:  your likelihood to grow your business in the future and at what rate.
  3. The Switzerland Structure:  how dependent your business is on any one employee, customer or supplier.
  4. The Valuation Teeter Totter:  whether your business is a cash suck or a cash spigot.
  5. The Hierarchy of Recurring Revenue:  the proportion and quality of automatic, annuity-based revenue you collect each month.
  6. The Monopoly Control:  how well differentiated your business is from competitors in your industry.
  7. Customer Satisfaction:  the likelihood that your customers will re-purchase and also refer you.
  8. Hub & Spoke:  how your business would perform if you were unexpectedly unable to work for a period of three months, i.e, how dependent is your business on you?

To find out how you're performing on the eight key drivers of Sellability and start your journey to increasing the value of your largest asset, click here to get your Sellability Score now.

512-327-0427 



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