Four out of ten entrepreneurs overestimate the sales value of their businesses. On average, those entrepreneurs think they will get 30% more for their business than the fair market value, a price that is "fair" to both buyer and seller.
This is one of the results of the Brookz Takeover Barometer, the semi-annual research of takeover platform Brookz, on figures and trends in the takeover market. The survey was conducted among 178 merger & acquisition advisers (approx. 700 advisers) who together represent more than 90 percent of the SME takeover market (businesses with revenues between 1 and 30 million euros).
Reasons for overestimation
In most cases, the overly optimistic valuation is caused by wishful thinking (36%). For example, entrepreneurs assume the amount they need for retirement and see that as the starting point of negotiations. Other reasons for overestimating the value of the business are: Misinformed by friends/acquaintances (24%), Self-overestimation (23%) and Misinformed by the business acquisition advisor (17%).
In addition, according to Floyd Plettenberg, responsible for this research within Brookz, there are still many entrepreneurs who really have no idea how buyers look at the value of their businesses. Plettenberg: "Selling entrepreneurs look too much at the past and also confuse the actual value of their businesses with emotional value (invested blood, sweat and tears). Those things are of no interest at all to a buyer. He looks primarily to the future, where synergy can be realized and how long it will take him to earn back the purchase price paid.'
Outlook
Although more than 15% fewer businesses were sold in the second half of 2015 than in the first half, the outlook for 2016 is still positive. A majority of acquisition advisory firms (52%) expect the current high level of activity to continue in the next six months as well. 35% even expect the market to pick up even further. Only 13% of advisers expect the acquisition market to deteriorate in the next 6 months.
Report grade
Expressed in a report grade, takeover advisory firms give the takeover climate in the second half of 2015 an average of 6.9. For the expected acquisition climate in the next 6 months, respondents gave an average report grade of 7.3.
EBITDA Multiples by Industry — H2 2015
| Industry |
Multiple H2 2015 |
Adjustment compared to Q2 |
| Healthcare & Pharmacy |
5,8 |
+0,05 |
| ICT & Internet |
5,7 |
+0,05 |
| Agri & Food |
5,3 |
— |
| Industry & Manufacturing |
5,0 |
+0,05 |
| Business services |
4,75 |
— |
| Media, Advertising & Communications |
4,6 |
— |
| Wholesale & Retail |
4,4 |
+0,05 |
| Hospitality, Tourism & Recreation |
3,95 |
— |
| Construction & Installation Engineering |
3,7 |
— |
| Automotive, Transportation & Logistics |
3,65 |
— |
| Average (calculated) |
4,69 |
— |
Survey date: end of H2-2015. Adjustment is relative to the base multiple from the Q2-2015 Barometer. The average is not stated as such in the report and has been calculated here across the ten sectors. Source: Brookz Takeover Barometer H2-2015 (February 2016).
Summary
- In H2-2015, the participating M&A advisory firms advised on 201 acquisition transactions and 243 sale transactions.
- The number of transactions fell by at least 15% compared to H1-2015, although the comparison is not exactly one-to-one due to the much larger response group.
- The number of sales transactions advised on was more than 20% higher than the number of acquisition transactions—advisers are more often active on the sell side.
- The Agri & Food sector saw a striking decline: only 18 transactions were completed, half as many as in H1-2015.
- More than 60% of M&A advisory firms saw the number of new engagements rise by more than 10% in H2-2015; 15% even saw an increase of more than 25%.
- Only 45% of business owners realistically estimate the value of their company; those who do not overestimate the value by an average of 30% in 70% of cases.
- Approximately 70% of business owners are not actively working to optimize the sale value one year prior to the sale.
- Sentiment remains positive but is becoming more divided: 35% expect further growth and 52% expect stability, while 13% expect a decline—compared to just 2% in the previous Barometer.
