Merger and Acquisition Industry Activity Reports – business products and services, health care, and information technology

I found some recent M&A Industry Activity Reports from McGladrey.  Industries included business products and services, consumer products, health care merger and acquisition, and information technology M&A.  They look like great reports – take a peak with the link below.

Click for Merger and Acquisition Outlook in Business Services, Healthcare and more

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

 

Small Business – Business Valuation Formula and Example

Business valuation for M&A or other purposes such as divorce, partner disputes, IRS and estate planning purposes are complex formal processes.  What is provided here is a basic rule of thumb business valuation approach useful for preliminary planning for companies with revenues between $50,000 and $5,000,000 and/or owner profit plus owner salary of $75,000 to $500,000 range. 

Do not use the provided business valuation formula for formal final uses such as going to market in a sale situation or legal proceedings etc. without review and approval of a valuation professional.  Many businesses such as contractors, engineering firms, sub-contractors, specialty contractors such as electrical contractors, plumbing contractors, HVAC contractors, landscape contractors, suppliers, retailers, business services, manufacturers and the like can use this business valuation formula.

Want to know more?  Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation” 

A small, owner-operated businesses with an active working owner who performs day-to-day tasks such as sales, production, direct management etc., can be valued using the following formula: 

Owner’s salary plus profits plus expenses benefiting the owner (such as underemployed family member on the payroll; exotic travel to conventions; auto; heath insurance; pension to owner etc.)  plus one-time charges (perhaps a large legal bill in one year only) plus interest plus depreciation and amortization equals the Seller’s discretionary earnings or SDE. 

If you are an absentee owner in a business that is usually owner run,  then you can add your manager’s salary back to the cash flow.  If you have cost advantages your Buyer will not have, subtract these.  Those often involve rent where you own the building the business occupies.  Most Sellers adjust the rent to market cost at the time of the sale so that should be factored into the formula.                         

Some people call this “normalizing” the cash flow.  The idea is to show a Buyer what her normal discretionary earnings will be.  They are called discretionary earnings because the owner decides what to reinvest and how to pay herself.  You can pull many of these figures directly from the company income tax return.  The total is then multiplied by a value called a multiplier.  In most cases the multiplier is 1.5 to 6 with between 2.3 to 2.7 being about average for small businesses. 

 Example of Calculating Value:

Consider this example of Bob Smith who owns Smith Electric.  Bob has a steady base of service work with some new construction mixed in.  Bob has four service crews and still often performs remodeling jobs himself.  Bob makes about $100,000 in salary.  His wife makes $35,000 working one day a week as the bookkeeper.  Bob drives a company truck all the time.  He has health insurance through the company.  He spent $12,000 last year on interest and had $35,000 in depreciation.  Bob runs the business from an office warehouse which he owns.  The business does not pay rent to Bob for Smith Electric’s 2500 square feet of space.   

The valuation math would work like this:

 Salary $100,000 plus excess salary to wife estimated at $20,000.  Plus personal use of truck estimated at $5,000 plus health insurance at $11,000 plus interest at $12,000 plus depreciation at $35,000 minus $24,000 estimated rent.  This totals $159,000.  Assuming Bob has a high percentage of service work which tends to be predictable then his multiplier might be around three.  That would put the value of his business at about $477,000.  If Bob mainly performed new construction work obtained from competitive bids, his multiplier would be around two because of the risk involved in obtaining future work. 

Please note that this is a useful formula for preliminary planning or tracking your progress but is not a substitute for a proper valuation when selling your business.  NEVER go to market or enter into important negotiations or legal proceedings based on a rule of thumb formula such as this.  Get proper valuation assistance.  (Call us).

Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors
609-664-7955

gcaruso@harvestbusiness.com
www.harvestbusiness.com

 


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PitchBook Reports that Merger and Acquisition Prices Rise in First Quarter 2013

PitchBook, an information firm that specializes in tracking the activities of Private Equity Groups (PEGs) and their business acquisitions and business sales has reported the the business sales price multiples for both EBITDA and Revenues have gone up in the first quarter of 2013.  The PitchBook analysts  break the market into 3 price range categories, under $25 million, $25 million to $250 million, and over $250 million.  Average prices of firms with revenues under $25 million purchased by PEGs is now about 5 times EBITDA and just under 1 times revenues.   Click to link to the PitchBook site where you can download the report.

What this means is that business valuations and the final sales prices for profitable well run companies, what we call “working models” is rising.  If you are prepared, now is a good time to take your business to market.

By, Gregory R. Caruso

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Construction Contractors, Sub-contractors, Engineering, Specialty Trade Firms Growing Fast, Work On Succession Plan or Exit Strategy Now

Construction, Sub-contracting, contracting, engineering, specialty trade contractors etc. are again the fastest growing small businesses.  Owners of these cyclical businesses should start planning for their succession plans and exit strategies while the economy is supporting growth. A time of growth is a great time for mergers and acquisitions, M&A – as either a buyer or a seller.  After the difficulties of the last four or more years now is the time for construction contractors and related engineers, specialty trades, supply houses and the like to both grow and work on their succession plans, exit strategies, and begin the M&A or business sale process.

Cat Clifford, small business expert at Entreprenuer Magazine, says that Sageworks did a study and found the below list to be the fastest-growth industries.

She writes, “Past performance is no guarantee of future results, as the old business truism says. But you also may have heard that you can’t know where you’re going without knowing where you have been.”

Time to Sell Your Construction Business? Please click here to download the e-book, “A Contractor’s Guide to Succession Planning”.

Fastest-Growth Industries for U.S. Small Businesses in 2012

1. Residential building construction: 14.77 percent
2. Building custom software and servers for businesses: 14.29 percent
3. Machinery, equipment, and supplies merchant wholesalers: 13.75 percent
4. Management, scientific, and technical consulting services: 12.31 percent
5. Architectural, engineering, and related services: 11.40 percent
6. Foundation, structure, and building exterior contractors: 11.37 percent
7. Building finishing contractors who make additions, alterations, maintenance and repairs: 11.32 percent
8. General freight trucking: 10.41 percent
9. Services to buildings and dwellings, including pest exterminators, janitorial services, and landscaping: 10.11 percent
10. Other specialty trade contractors, including site preparation activities and other specialized trades: 10.04 percent

To see Cat’s article, Click here

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

 

Business Exit Strategies or Business Succession Planning for Retirement

Fact – Most small business owners don’t make nearly enough money from the sale of their business to survive the thirty to forty years they may live after the sale.  This must be realistically considered in your business exit strategy or your business succession plan.  You must start saving for retirement early and consistently.  Consider a tax assisted retirement savings program.  Another business exit strategy or business succession plan is to buy the real estate where your business is located.

In all events find a financial planner you trust and start today.  There is nothing worse than being physically or mentally exhausted and having to leave the business but  resisting it because your business succession and retirement plan did not generate the necessary downstream financial resources.

Considering Selling Your Business? Please click here for a downloadable e-book, “ 10 Ways to Increase the Value of Your Business“.

Many owners we work with intend to augment their savings by seeking employment in the future.  They just want to get the weight of owning a business off their shoulders.  If the income expectations and time requirements are realistic this is a good component of the business exit strategy or business succession plan.  Limited future employment is becoming a normal component of many business owners’ strategic plans.

If you are not in a position to properly develop these types of business plans yourself meet with a competent financial planner early.  Find a way to save.  Make it a priority because your future depends on it.

 Tip:  Every year you should assess your succession plan and exit strategy.  This would include updating the buy-sell agreement and related insurances if you have partners, developing a management plan specifying plans during your disability or your death, tracking your outside investments, and working on an exit strategy. 

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000