There is continued evidence multiples have plateaued. For the third quarter of 2018, valuations averaged 7.3x EBITDA, which is a reduction from the second quarter 2018 average multiple of 7.4x and the peak multiple of 8.0x achieved in the fourth quarter of 2017.

"The M&A market is driven by corporate performance, availability of debt and general economic strength."

On a positive note, deal activity increased over Q2 and reversed a downward trend from the Q4 2017 peak. During the third quarter of 2018, there were 63 deals recorded by GF Data®. This is higher than the Q2 activity of 47 deals. One interpretation of this data is that the market has reached equilibrium and buyers are showing more restraint than a year ago. We expect choppiness in activity to continue as valuations continue to fall off historical highs and buyers and sellers take time to adjust.

 
The table below details the quarterly trends in valuation for transactions of different sizes. Across almost all sizes, Q4 of 2017 represented the peak multiple, while Q3 of 2018 represented a bit of a rebound off of Q2 2018.

Debt levels have also been exhibiting a downward trend. Total debt to EBITDA was 3.8x in Q3 2018, a continued reduction from peak levels in 2017. It should be noted that the relatively larger deals have continued to show that near-peak leverage levels remain achievable. For deals ranging in size from $100 million to $250 million, the average multiple was 4.8x, which is at or near peak levels.

"There is still time for sellers to achieve great outcomes in a sale, but the clock is ticking!"

Buyers are beginning to show more caution when financing transactions, assuming that a cycle event will occur over a portfolio company holding period. This caution has been more pronounced in cyclical industries.

In summary, it is widely assumed in the marketplace that the cycle is in the final stages. Buyers are modeling in softness and showing restraint in debt utilization. Valuations continue to be very high by most historical measures. Our perspective and the data indicate that there is still time for sellers to achieve great outcomes in a sale, but the clock is ticking!

The content of this material should not be construed as a recommendation, offer to sell or solicitation of an offer to buy a particular security or investment strategy. The content of this material was obtained from sources believed to be reliable, but neither Wipfli Corporate Finance Advisors, LLC nor RKCA, Inc., warrants the accuracy or completeness of any information contained herein and provides no assurance that this information is, in fact, accurate. The information and data contained herein is for informational purposes only and is subject to change without notice. This material should not be considered, construed or followed as investment, tax, accounting or legal ad vice. Any opinions expressed in this material are those of the authors and do not necessarily reflect those of other employees of Wipfli Corporate Finance Advisors, LLC or RKCA, Inc. Investing in the financial markets involves the risk of loss. Past performance is not indicative of future results.