Valuations Continue to Rise in Seller's Market

Mar 01, 2014
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Market Updates

Please be aware: More recent data has been published since the time of this post. To see current market trends, check out the most recent issues of Market Updates.

Valuation multiples are up, while transaction volume is down, showing a continuing seller's market in which deal demand exceeds supply. The number of transactions closed by Gf Data's 187 active data contributors in 2013 totaled 135, the lowest level since 2009, despite capital overhang (the amount of available funds) at near record levels. Further evaluation of the valuation multiples reveals some interesting trends.

Platform acquisitions by PE firms have traditionally been made at higher multiples than add-on acquisitions, the theory being to pay a premium for size and an entrance to a desired industry and then gain arbitrage and scale by purchasing odd-ons at lower multiples. In 2013, multiples paid for add-on acquisitions were higher than multiples paid for platform acquisitions by .5 to .8 times EBITDA. (See chart A)

This is consistent in volume with Pitchbook's fourth-quarter Private Equity Company Inventory Report, which shows there were more add-on acquisitions than platform deals in 2013-the first time this has ever happened. The median hold time for PE investments has continued to increase, reaching a high of 5.98 years after increasing steadily since 2007.

Valuation multiples were lower for individual and family sellers compared to PE and corporate sellers for companies in the $25M-$50M total enterprise value and $1OOM-$250M total enterprise value range. Too often, we see quality family businesses that choose not to put the company on the market but rather sell to an individual buyer, realizing a good value, but significantly less than what is possible through an M&A advisor who conducts a thorough process, highlighting the seller's strengths and key attributes to buyers that have the background and resources to capitalize on the opportunities available.

Another interesting trend is the continuing premium paid for businesses with above- average financial performance and those with senior management continuing and retaining equity or in which the buyer has senior management to put in place. Premium businesses are defined as those with trailing 12-month EBITDA margin and revenue growth rate above 10% or one above 12% and the other at least 8%. Outliers on the high side are also excluded. The premium paid for above-average financial performers was 18% in 2013.

Valuation multiples in 2013 were highest for companies in the health care services, retail, and technology sectors. The sectors that jumped the most in value between 2012 and 2013 were business services, retail, and technology. (See chart B)

This is consistent with enterprise value to the latest 12-month EBITDA valuation multiples as reported in Capital IQ; these were up in January 2014 over January 2013 in all industry sectors, with health care and technology leading the way at a 25% and 27% increase, respectively.

It is a good time to be a seller, with low interest rates, fewer quality sellers, and continued strong buyer demand. The number of sellers coming to market continues to increase, at which time valuation multiples should level out. For an analysis of market value or consultation regarding the sale of your business or to search for add-on acquisitions, consult one of our Wipfli Corporate Finance team experts.

Market data proprietary to GF Data Resources may not be reprinted, reproduced, or used without permission from GF Data Resources or Wipfli Corporate Finance Advisors, LLC. Market data proprietary to PitchBook may not be reprinted, reproduced, or used without permission from PitchBook or Wipfli Corporate Finance Advisors, LLC. 

 


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.

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