Posted by: Ray Al-Malt
Valuation is an art, rather than a science, and there are many contributing factors that do not typically lead to a black-and-white picture for what a business will sell for. In 2017 the global median private equity EBITDA multiple was 10.7, up nearly 91% from the low point in 2009. The upward trend in valuation multiples, along with where we are in the business cycle, gives business owners looking to sell a fantastic opportunity to exit at an ideal time.
2018 continues to be a strong year for small business sales due to rising revenues and a new generation of entrepreneurs seeking to enter the market. A record number of small businesses are being exchanged due to improving financials and many Baby Boomers exiting the market. The number of reported businesses sold in the first two quarters of 2018 is on pace to surpass the 2017 record high, according to BizBuySell.com. This is the most of any quarter we have seen so far, and the trend is likely to continue to grow for the near future.
Median revenue of businesses sold in this quarter saw a 7.4% increase from last year, while median cash flow continued to grow 3.4%. What does this mean for you as a seller? Stronger financials mean owners are in a great position to post higher asking prices. This is reflected in median sale price rising 4.4% last quarter. This reflects an opportunity for both buyers and sellers. Buyers can take advantage of acquiring businesses with stronger financial foundations, while sellers are able to reap more cash from the deal. Many Baby Boomers seeking retirement are seeing this as a golden opportunity to exit while selling prices remain at an all time high and financial performance remains strong.
The Tax Cuts and Jobs Act, passed in 2017, is likely to increase the number of business transactions due to the 20% deduction in qualified business income many owners can take advantage of. We are optimistic about the outlook for the rest of the year. As financials for small businesses continue to rise, sellers can continue to take advantage of high sales prices, while buyers will find both quality and quantity when it comes to their search.