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Q3 2019 Middle Market M&A Update

January 21, 2020


According to the most recent GF Data® M&A Report, valuation multiples remain elevated through the third quarter of 2019. Through data collected by over 200 active private equity contributors, GF Data reported a total of 50 transactions in Q3, with an average 7.4x Trailing Twelve Months (TTM) Adjusted EBITA. This level is unchanged from the previous period and is at the upper end of the market range over the past two years.

All Transactions 1Q 18 2Q 18 3Q 18 4Q 18 1Q 19 2Q 19 3Q 19
# of Deals 77 50 73 65 83 64 50
TEV/EBITDA 6.9x 7.3x 7.1x 7.7x 6.9x 7.4x 7.4x

Source: GF Data®

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

While at an aggregate level, multiples appear relatively stable, but digging into the numbers produces a couple of surprises. Through the first three quarters of 2019, total average valuations across all Total Enterprise Value (TEV) categories stood at 7.2x TEV/EBITDA, virtually identical to the year-end averages in both 2017 and 2018. The first surprise is the weakness year-to-date (YTD) in the second highest TEV segment ($50-100 million). In past quarterly updates, we’ve commented on how the market clearly favors those companies in the two largest TEV categories by rewarding them with much higher multiples than those in the two smallest categories. While this trend is still certainly the case for companies in the $100-250 million TEV range, multiples in the $50-100 million range have softened considerably (from 8.9x at year-end 2018 to 7.5x YTD 2019).

We first commented on weakness in this sector in our Q2 2019 update. At the time, we chalked it up as an aberration and predicted multiples would recover to more recent levels by the end of the year. Dampened multiples in this segment have persisted long enough, however, that it seems other forces may be at play. Are business owners in the $50-100 million TEV range now willing to accept down-to-earth valuations to achieve exit before a downturn becomes a reality? We’ll continue to monitor this trend in future updates.

Total Enterprise Value (TEV) chart/ EBITDA

Source: GF Data® 

The second surprise in the Q3 GF Data report has to do with buyouts in the smallest TEV bracket ($10-25 million). Through the third quarter, multiples for all companies in this range averaged 6.2x. However, looking only at companies with “favorable pricing characteristics” (defined by GF Data as companies with above-average financial characteristics, a post-closing management solution and a private equity or corporate seller), the multiple jumps to 7.1x. This indicates the M&A market is willing to pay a premium for attractive businesses, even in the lowest TEV segment.

What This Means for Business Owners

If you’re a business owner contemplating exiting your business within the next five years, it’s important to stay current on the M&A climate and the activities of other business owners in your sector. Although the market may currently be ripe for an exit, we suggest 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 well in advance of a planned exit. At CSH, we can walk you through the exit planning process, helping you uncover opportunities to build additional value in your business and address potential issues that could result in significant transaction value 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, Scott McRill or Matt Gutzwiller on our 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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