Valuations: What’s My Small Business Worth?
“In terms of valuation, what’s my small business really worth?” I get variations of that question all the time. But today we’ve got some new data to share on small business valuations — though the information isn’t specifically limited to VARs, MSPs, CSPs and telco agents.
Let’s assume you own a business that generates $1 million to $2 million in annual revenues. That business is likely worth about 3.3 times EBITDA (earnings before interest, taxes, depreciation and amortization). Scale your revenues to $2 million to $5 million, and your valuation climbs to a stronger 4.0 times EBITDA. Keep climbing and achieve $5 million to $50 million in annual revenues, and your business is worth roughly 5.1 times EBITDA.
The chart below explains the valuations a bit more clearly on a quarter-by-quarter basis. Valuations for really small businesses (sub-$1 million) are based on SDE (Sellers Discretionary Earning) rather than EBITDA multiples.
Small Business Valuations: Research
The data points above come from the quarterly IBBA and M&A Source Market Pulse Survey for Q2 2016. The survey was completed by 378 business brokers and M&A advisors, representing 38 U.S. states. Respondents completed 409 transactions during the quarter and over half (55%) had at least 10 years of experience in the industry.
Just to be extra clear: Only a portion of the M&A deals involved IT services and professional services. Restaurants, business services and manufacturing companies made up the bulk of the deals. Here’s a look at the top three vertical markets for M&A activity across each revenue level, according to the survey results:
IT Service Provider M&A Activity
Based on demographics — ownership ages, etc. — ChannelE2E expects M&A activity across the IT services market to accelerate at least through 2022 before tapering off a bit. But that doesn’t mean valuations will continue to rise. Overall, valuations for IT services companies have been remarkably consistent — with most MSPs fetching somewhere between 5X and 8X EBITDA in recent years, and reseller-centric VARs valued substantially below that.
Still, there are at least five ways to boost your business’s valuation. And some higher valuation deals occasionally surface. For instance, Xylem acquired Sensus, an MSP with sensor-centric intellectual property — for 10.7 times EBITDA. The $1.7 billion deal surfaced in August 2016 and is expected to close in late 2016.
MSP, VAR Valuation Experts
In addition to ChannelE2E’s ongoing M&A coverage, a range of sources across the IT channel have first-hand or anecdotal valuation expertise that VARs, MSPs and CSPs can leverage. Names to know include Cogent Growth Partners, HTG Peer Groups, Martin Wolf, Service Leadership Inc. and TruMethods, among others.
in my experience, one of the factors that influence the EBITDA multiplier is the nature of the business: if the business is mostly one time, ie resell of HW & SW with professional services, then the valuation will be at the low end of the range; if the business is mostly recurring, ie managed services or cloud services, then the valuation will be at the high end of the range.