Healthy Economies of Scale for Larger Deals – From Jordan Zweigoron
Healthy Economies of Scale for Larger Deals
When it’s time to sell a small business, Sellers often become singularly focused on price. How much can my business sell for?
There are many factors that contribute cumulatively to the value which a Buyer is willing to pay. Among these value drivers are: year-over-year revenue and profit growth, required specialized knowledge of the owner, a stable team of employees, a strong climate in your particular industry, a healthy economic market at large, and many more factors.
However, a key factor often overlooked is the value associated with the current size of your business. In a recent quarterly report by BizBuySell, the company published statistics regarding to the size of transactions completed in Q1 2019. The results were interesting.
The BizBuySell research looked at companies that sold at a price above $1M, relative to all businesses which sold on the platform
A majority of BizBuySell transactions are closer to the $225,000 median transaction value. However, there are many transactions that have sold for over $1M. Some facts related to businesses sold above the $1M threshold in Q1 2019:
- Sellers of these larger businesses enjoyed higher multiples, relative to Sellers of smaller businesses. On average, the larger businesses saw an average cash flow multiple of 3.83, relative to a smaller multiple of 2.33 for all deals.
- The more highly valued businesses fared better in negotiations with Buyers. For businesses sold above $1M, these Sellers receive 91% of their asking price. In contrast, when looking at all sold deals in the same timeframe, Sellers received 91% of their asking price.
- On the downside, the larger transactions took slightly more time to sell, which might be explained by the complexity involved in larger deals.
When business owners are considering selling, they’ll often ask, “how can I maximize the selling price of my business?” While many factors are involved in this answer, one conclusion based on the research above: strive to grow and build your business, since larger businesses enjoy healthy economies of scale, which work in favor of Sellers.