When it comes to selling a business, size does matter. The data shows that there is a direct correlation between the total sales of a small business and the price it can command when it is sold. The chart below shows the trend of the average transaction price for companies, expressed as a multiple of Seller Discretionary Income (SDE). The chart depicts that larger companies consistently outperform smaller businesses when it comes to the multiple of the SDE that buyers are willing to pay.
Companies with sales in excess of $5 million per year selling for an average of 3.96 times their SDE since 2003, seeing a peak valuation of over 5.0 times the SDE in 2007. Over this same time period, companies with annual sales between $1 million and $5 million sold for an average multiple of 2.87. This is the segment that has also seen the greatest stability in multiples since 2003. Finally, companies with annual sales of less than $1 million, i.e. smaller companies, sell for an average multiple of 2.21.
So why is bigger better in this situation?
- Larger businesses are generally more stable, thus they can weather adverse short-term economic trends well.
- Larger companies usually have more employees sharing in the workload so the owner has less responsibility on their plate.
- Further larger businesses tend to have more procedures in place, making them able to function more smoothly without the owner?s oversight.
So while the data suggests that greater annual sales do lead to a larger sell price, this does not exclude smaller businesses from reaping a solid sell price. Many smaller companies that are well run, have documented procedures, and keep clean books, do sell for above average multiples.
Here at Transworld, we work with businesses of all sizes, especially businesses that are closely held, or family businesses as well as mostly "mainstream" industry companies. We are well versed in preparing these types of businesses for sale and are able to bring our owners a selling price they deserve. In addition to our large amount of experience and in-depth expertise, owners benefit from the size of our network and the franchise resources at our back. Transworld Denver is the largest business brokerage firm in Colorado and Transworld LLC is the largest business brokerage company in the US. Our international reach is growing as well, with recent additions in England and Canada. We have over 100 offices in the U.S., over 500 brokers, and more than one $1 billion worth of businesses listed for sale. Our ability to reach potential buyers is unmatched in the industry. When it?s time to sell your business, schedule a free consultation with Transworld Denver and we can explain how we will position your business to sell at a great price!
Ross Haymes is a Business Broker at Transworld. He draws on his decades of experience in corporate finance and entrepreneurship to guide buyers and sellers toward their goals. During his 20-year career with NYSE-listed Burlington Industries, Ross served as an economist before becoming Investor Relations Director. Upon retirement, Ross realized his own dream of becoming a small business owner. In his role at Transworld, he works directly with business owners to orchestrate, step-by-step, the buying, selling, and growth of their companies.