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Multiples are at all-time highs for business purchases and unlike the past, these multiple increases have trickled down to even the lowest sectors of the business for sale market.
Prior to the last market downturn in 2008, when businesses were selling quickly, the lower-end of the businesses for sale market that were generating at least $150,000 of Adjusted Net Income, with an average of $500,000, were selling at 1.97 x multiple. Measuring the last 12 months stats through one of the databases I use in the M & A world (used mostly by business brokers and therefore at the lower end), the average multiple for the same criteria net has been 2.84 times.
A colleague of mine suggested that these multiples are “never coming down”, which to me is a pretty broad statement and one would say borders on predicting the future.
In the mid-market, I tend to find their statement a little more plausible. Credit is readily available, there is an enormous amount of unused committed capital in the private markets and the very nature of a PE fund’s obligation to deploy capital may sustain these multiples.
So, the question becomes should a buyer sit it out for a while hoping these multiples come down? Or, are these new levels simply the new normal?
I wish I could suggest an answer with absolute certainty, but that would be foolish. Besides, if I could, I may be better served to play the lottery.
To the smaller business buyer, it would be easy to stay on the sidelines. After all, with increasing multiples and some so-called experts predicting a recession, it would be easy to take a ‘wait and see’ approach. However, that is not prudent. Multiples may continue to rise. As long as you acquire a business that has historically fared okay to well in difficult times and you do not over leverage, you should be fine. The sustainability of the business is critical – whether in good times or bad. Your focus has to be on acquiring a good business with solid fundamentals.
Yes, it is possible you may overpay slightly, but contrast that to the lost opportunity costs of not getting into the game for a few years.
March 4, 2019 at 02:20PM
Forbes – Entrepreneurs