Signs of the times

A recent report shows that valuations of businesses sold this year have dropped, as sellers have been forced to accept less-than-ideal prices for their businesses in this struggling economy.

The average for mid-market purchase price multiples fell to 5.1 times 12-month EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), according to data gathered by GF Data Resources LLC.

Buyers have been lowering their expectations of these companies’ future earnings and the selling prices have reflected those diminished expectations.

“That number knocked me over because it was such a drop from the multiples we’ve seen in prior reports,” GF Data Resources co-founder and CEO Andrew Greenberg said in buyoutsnews.com.

That private company owners are accepting these lowered prices probably indicates that they simply can’t afford to wait out the weak economy to sell their businesses. The closing prices in the third quarter of 2009 also are the conclusion of transactions probably begun in the first quarter of the year, if not sooner.

River Associates Investments partner Mark Jones told Private Equity Professional Digest, “Given the long ‘fuse’ present in the current deal world, transactions closed in the third quarter were likely initiated in or near the first quarter, which was a time of material economic uncertainty with few companies willing to entertain a sale process unless there was a catalyst (often negative) that mandated such an event.”

The reality is that even though economists say the recession is “over,” small-business owners continue to suffer from a sluggish recovery. Unemployment numbers and the GF Data Resources report are just two indicators.

Better times will return to small businesses and the economy at large, but in the meantime we’ll continue to struggle.

Eric R. Voth is a serial entrepreneur, a private investor, consultant, and writer. He is author of How to Sell Your Privately Owned Company, a Basic Guide for Independent Business Owners, Baby Boomer’s Edition. Eric and his colleagues help a business Seller prepare and groom his or her company prior to offering it for sale or merger – then guide the owner through the actual process. He became involved in this field as a result of merging his own company in 1993.

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