Benchmarking Seller s Discretionary Earnings in a Small Business

Transcription

1 A BVR Special Report Excerpt from Benchmarking Seller s Discretionary Earnings in a Small Business Based on data from Pratt s Stats What It s Worth

2 Benchmarking Seller s Discretionary Earnings in a Small Business Based on data from Pratt s Stats A BVR SPECIAL REPORT 1000 SW Broadway, Suite 1200, Portland, OR

3 Copyright 2015 by Business Valuation Resources, LLC (BVR). All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher or authorization through payment of the appropriate per copy fee to the Publisher. Requests for permission should be addressed to the Permissions Department, Business Valuation Resources, LLC, 1000 SW Broadway St., Suite 1200, Portland, OR 97205, , fax Information contained in this book has been obtained by Business Valuation Resources from sources believed to be reliable. However, neither Business Valuation Resources nor its authors guarantee the accuracy or completeness of any information published herein and neither Business Valuation Resources nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Business Valuation Resources and its authors are supplying information but are not attempting to render business valuation or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Editor: Jan Davis Publisher: Sarah Andersen Managing Editor: Janice Prescott Chair and CEO: David Foster President: Lucretia Lyons Vice President of Sales: Lexie Gross Customer Service Manager: Retta Dodge ISBN: Library of Congress Control Number:

4 Table of Contents Executive Summary...4 Methodology...7 Industry Groups...13 All Industries (SIC )...14 Agriculture, Forestry, and Fishing (SIC )...16 Construction (SIC )...18 Manufacturing (SIC )...20 Transportation, Communications, Electric, Gas, and Sanitary Services (SIC )...22 Wholesale Trade (SIC )...24 Retail Trade (SIC )...26 Finance, Insurance, and Real Estate (SIC )...28 Services (SIC )...30 Food Stores (SIC 54)...32 Real Estate (SIC 65)...34 Personal Services (SIC 72)...36 Business Services (SIC 73)...38 Automotive Repair, Services, and Parking (SIC 75)...40 Health Services (SIC 80)...42 Lawn and Garden Services (SIC 0782)...44 Restaurants (SIC 5812)...46 Bars and Drinking Places (SIC 5813)...48 Real Estate Agents and Managers (SIC 6531)...50 Beauty Shops (SIC 7231)...52 Business Services, Not Elsewhere Classified (SIC 7389)

5 Executive Summary Seller s discretionary earnings (SDE), a common cash flow-based measure of business earnings for the owner-operator managed business, is an integral figure in small-businesses transaction data. For a small-business appraiser, it represents an important financial metric to value a business. For a business intermediary, it is a crucial figure used to price and list a business for sale. For the owner-operator of a small business, it represents a measure of earnings that an owner is achieving, and this figure can serve as benchmark indicator for other companies in the same industry. What all these groups share is that this information is crucial, and real-world data from small private-business sales is of high value. In this special report, we use a database of over 23,000 business transactions to analyze sold private businesses and look at companies based on their size and industry. Our analysis consists of the following: Discretionary earnings to revenue; Selling price to discretionary earnings; and Profit margins. For size, we organize the companies into descending order based on revenues and create five groups of equal counts (quintiles). While some variations exist among the different industries, several common relationships appear within the data. As revenues increase, the absolute amount (the dollar amount) of SDE tends to increase, while SDE as a percentage of revenue tends to decline. Said inversely, discretionary earnings for smaller businesses tend to be a lower dollar figure, but a higher percentage of revenues. Exhibits 1 and 2 show that companies in the quintile with the largest revenues have a median SDE value of $345,933, while those in the middle quintile have a median SDE figure of $87,376, and those in the smallest quintile have a value of $36,925. Exhibits 1 and 2 also show that the quintile with the greatest revenues has an SDE to revenue figure of 13.3%, while those in the middle quintile have a figure of 20.0%, and the smallest companies have 35.8%. 4

6 Benchmarking Seller s Discretionary Earnings in a Small Business: Based on data from Pratt s Stats Quintile Revenue Exhibit 1. Seller s Discretionary Earnings by Quintile and Based on Revenues Owner s Compensation Discretionary Earnings Discretionary Earnings to Revenue Selling Price to Discretionary Earnings Gross Profit Margin Operating Profit Margin Net Profit Margin 1 $2,323,249 $90,000 $345, % 3.0 x 43.0% 7.0% 7.0% 2 $820,652 $31,875 $147, % 2.3 x 63.0% 11.0% 10.0% 3 $446,000 $7,000 $87, % 2.1 x 68.0% 14.0% 13.0% 4 $240,192 $0 $61, % 1.8 x 73.0% 20.0% 19.0% 5 $112,571 $0 $36, % 1.7 x 84.0% 30.0% 30.0% All companies with a value of Discretionary Earnings were included. Quintiles sorted by revenue. Data represent medians for that quintile. Total count of companies: Jan. 1, present. U.S. deals only. Private buyers only. Owner s compensation is the salary the owner pays himself/herself. Discretionary earnings is a better measure of cash flow to the owner, which includes the owner s salary and the earnings of the business prior to depreciation, amortization, and interest expenses. Includes SIC codes Exhibit 2. Median Discretionary Earnings (DE) and DE to Revenue by Quintile Discretionary Earnings $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 Median Discretionary Earnings Median Discretionary Earnings to Revenue 40% 35% 30% 25% 20% 15% 10% 5% Discretionary Earnings to Sales $ Quintile 0% As company size increases, based on revenues, businesses sold for a greater price relative to discretionary earnings. Exhibit 3 shows that the companies in the quintile with the highest revenues sold their businesses for 3.0 times their SDE figure, while those in the middle quintile sold their business for 2.1 times discretionary earnings, and the smallest companies sold for 1.7 times. Exhibit 3. Median Selling Price to Discretionary Earnings (DE) and Median Revenue by Quintile $2,500, $2,000,000 Median Revenue Median Selling Price to Discretionary Earnings 3.0 Revenue $1,500,000 $1,000, Selling Price to DE $500, $ Quintile

7 Benchmarking Seller s Discretionary Earnings in a Small Business: Based on data from Pratt s Stats As size increases, companies tend to be less profitable. The largest companies shown in Exhibit 4 have a median operating profit margin of only 7.0%, while those in the middle quintile have an operating profit margin of 14.0%, and the smallest companies have an operating profit margin of 30.0%. This also means that, as company profitability decreases, companies sell for a greater selling price relative to discretionary earnings. From our data, the most profitable group of companies (those with a median operating profit margin of 30.0%) sold for 1.7 times SDE, while the group in the middle with operating profit margins of 14.0% sold for 2.1 times SDE, and the least profitable companies (those with margins of only 7.0%) sold for 3.0 times SDE. Exhibit 4. Median Revenue and Operating Profit Margin by Quintile Revenue $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 Median Revenue Median Operating Profit Margin 35% 30% 25% 20% 15% 10% 5% Operating Profit Margin $ Quintile 0% 6

8 BVR What It s Worth Benchmarking Seller s Discretionary Earnings in a Small Business: Based on data from Pratt s Stats Seller s discretionary earnings is an integral figure in small-businesses transaction data. For a business appraiser, it represents an important financial metric for valuation. For a business intermediary, it is a crucial figure used to price and list a business for sale. For the owner-operator of a small business, it represents a measure of earnings - a figure that can serve as a benchmark indicator for other companies in the same industry. A BVR Special Report Benchmarking Seller s Discretionary Earnings in a Small Business Based on data from Pratt s Stats This new special report reveals what small business owners are achieving in seller s discretionary earnings by sector and company size with benchmarking from 21 industry groupings including real estate, personal services, restaurants, construction and more. We used Pratt s Stats, a database of over 23,000 business transactions to analyze seller s discretionary earnings in sold private businesses with metrics including discretionary earnings to revenue, selling price to discretionary earnings, and profit margins. Industries covered in the report include: What It s Worth Agriculture, Forestry, and Fishing (SIC ) Construction (SIC ) Manufacturing (SIC ) Transportation, Communications, Electric, Gas, and Sanitary Services (SIC ) Retail Trade (SIC ) Food Stores (SIC 54) Automotive Repair, Services, and Parking (SIC 75) Restaurants (SIC 5812) Bars and Drinking Places (SIC 5813) And more! Download an excerpt of the report and order at: bvresources.com/publications $79.00 (delivered as PDF via ) If you prefer, call Business Valuation Resources, LLC SW Broadway, Suite 1200, Portland, OR bvresources.com/publications