Bigger is Better Right now large companies are an especially hot commodity. Investors, such as private equity groups, will pay a higher multiple for large companies. This is due to their inherent safety versus smaller businesses.
When buying businesses investors typically offer a number based on a percentage of sales or EBITDA x multiple. EBITDA (also known as Earnings Before Interest, Taxes, Depreciation and Amortization) provides the buyer a rough estimate of free cash flows. The multiple the buyer chooses is based on the size of a company, the industry, and growth trends, among other things. The multiple determines the value of the estimated free cash flow your company generates.
Let’s take a quick look at multiples offered to companies of varying sizes. A small business (less than $5million revenue) may receive a multiple of 3.5x EBITDA. A business with $20 million of revenue will typically receive a multiple of about 5x and finally a larger business ($50 million revenue) can bring in a multiple of 6x. These multiples show just how much more investors are willing to pay for large companies.
Big companies have another advantage right now as evidenced in a study by Axial Market. The study found that in 2011 businesses with an EBITDA over $5 million have generated three times more interest than companies with a lower EBITDA in recent buyer activity.
SELLING A BUSINESS IN
2011: WHAT LIES AHEAD? The economy showed some positive signs in 2010, but was slow to produce a significant jump in the business- for-sale marketplace. Still, demand grew, and sellers offering solid businesses at realistic asking prices found a large pool of buyers waiting for the opportunity, according to business broker Domenic Rinaldi of Chicagoland Sunbelt. In this column, Rinaldi discusses what’s to come.
Source: SmallBusinessExecutive
These factors lead to the conclusion that the supply of large profitable companies is not meeting the demand of investors. The lack of supply in relation to demand indicates an opportune time to sell.
Plan Ahead
Now may not be the ideal time for everyone to sell their business, but if you’ve been contemplating an exit strategy you should give it consideration. A common mistake among business owners is delaying the planning of an exit strategy. A good exit strategy takes time to develop and implement so it’s important to plan ahead. Now could be a great time to start prepping your business for sale before the market becomes more crowded with fellow owners looking to sell.
YOUR
Aberdeen Advisors specializes in the sale and purchase of manufacturing, distribution, healthcare, technology and service businesses. Though we operate nationally, Aberdeen Advisors has particular expertise in mid-market businesses located in Florida and the Southeastern United States.
1326 Monterey Blvd. NE, St. Petersburg, FL 33704
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