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Middle Market Merger and Acquisition Update and Outlook

April 10, 2018


Middle market merger and acquisition (M&A) activity continued strongly in 2017, with valuation multiples surging to ever higher levels. As valuations continue their rise, sellers are seemingly in the driver’s seat led by several factors, including:

  • Optimism that the economy is strong and the current administration is business friendly
  • The continuation of low interest rates resulting in cheap financing (although it seems changes may be coming soon)
  • Private equity firms looking to deploy the large amounts of capital they have been raising
  • Strategic buyers flush with cash looking to put their reserves to good use in order to expand geographically, add a product line or increase market share.

 M&A Valuation Multiples by Total Enterprise Value (TEV)

Based on information compiled by GF Data® from over 200 private equity firms and other deal sponsors, the average valuation multiple at the end of 2017 was 7.4x in the $10-250 million TEV space. As you can see from the chart below, a premium was awarded to companies in the upper middle market (9.2x for companies with TEV of $100-250MM and 8.3x for companies between $50-100MM). While the lower middle market seems to be more disciplined, the upper middle market is where sponsor interest, and therefore multiples, are highest.

Source: GF Data®

M&A Valuations by Industry

Four business categories saw the highest deal volume over the past five years according to GF Data:  manufacturing, business services, distribution and health care services. While deal multiples at the end of 2017 averaged 7.4x across all industry groups, the chart below demonstrates that certain industry segments clearly commanded higher valuation multiples. Health care services and media & telecom were both rewarded with multiples of 8.1x and 8.2x, respectively; while technology commanded a whopping 10.2x multiple.

Outlook for 2018 and What it Means for Business Owners

We expect the current M&A environment to continue, as the same economic factors that led to strong deal volume and valuation multiples in 2017 should persist into 2018 as well. Potentially boosting deal flow in 2018 are sellers who pushed off end-of-year closings in 2017 in anticipation of the favorable federal tax changes resulting from the Tax Cuts and Jobs Act.

While it continues to be a seller’s market, we all know that markets can change quickly. As more baby boomers contemplate retirement, the pool of sellers will increase, leading to greater competition for buyer attention and potentially limiting valuations. In addition, we may see a spike in owners looking to exit their business now in order to take advantage of the high multiples currently being offered (many owners may be concerned that the market is peaking).

If you are a business owner and you’re contemplating exiting your business within the next five years, it’s important to stay current on the M&A climate and keep apprised of what other business owners in your sector are doing. Although the market may currently be ripe for an exit, we recommend owners think carefully about the timing of their exit to make sure it is right for them, their family and their business.

We also recommend that business owners speak with an M&A professional who can provide an unbiased viewpoint on their organization. At CSH, we can conduct sell-side due diligence that uncovers and addresses potential issues that could result in significant transaction erosion, or worse, a failed transaction, lost time and distraction from normal business operations. Performing sell-side due diligence helps ensure your business is presented in the best possible light, which better prepares you to negotiate the highest price possible for your business.

To discuss strategies for readying your business for sale, contact your CSH advisor or Dan Fales ([email protected]) or Scott McRill ([email protected]) on our Private Equity and Transaction Advisory Services team.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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