Q4 2018 Middle Market Mergers and Acquisitions Update

After discussions last quarter that the current “seller’s market” might finally be easing a bit, fourth quarter middle market M&A activity hints that there may still be a little room to run, according to the most recent GF Data® report. Through the first three quarters of 2018, average valuations were down from their second half 2017 highs of 7.5-8.0x Trailing Twelve Months (TTM) Adjusted EBITDA (2018 valuations came in at 6.8x, 7.3x and 7.2x in Q1, Q2 and Q3, respectively). Average valuations rebounded nicely, however, in the fourth quarter of 2018 to 7.8x. This late year rally raised average valuations for the full year to 7.2x, essentially in line with 7.3x for the full year 2017.

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

Based on historical information compiled by GF Data from over 200 private equity firms and other deal sponsors, the strongest average valuation multiples are typically in the largest TEV category ($100-250 million). In 2018, however, we crown a new winner as the $50-100 million category overtook the previous reigning champion. Multiples for the highest TEV category remained fairly consistent over the past four years (9.0x, 8.9x, 9.1x and 8.8x in 2015, 2016, 2017 and 2018 respectively), so the real movement happened as a result of strengthening valuations in the $50-100 million range rather than softness in the upper category. The average valuation multiple jumped from 8.2x in 2017 to 9.0x in 2018 in the $50-100 million space. We’ll continue to watch this TEV category over the coming quarters in 2019 to see if this valuation level has legs or whether it shifts back down to more historical levels.

M&A Valuations by Industry

Four business categories (manufacturing, business services, health care services and distribution) comprise approximately 80% of GF Data deal volume. While deal multiples averaged 7.2x across all industry groups in 2018, the chart below demonstrates that certain industry segments clearly commanded higher valuation multiples, particularly technology (9.6x), media and telecom (8.6x) and health care services (7.8x).

What it Means for Business Owners

While we still consider the current M&A environment to be a seller’s market, we all know that markets can change quickly. 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 (dfales@cshco.com) or Scott McRill (slmcrill@cshco.com) on our Private Equity and Transaction Advisory Services team.

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