Monthly M&A Market Snapshot – February 2017

With the Participation of Legacy Mergers & Acquisitions, the International Business Brokers Association (IBBA) and M&A Source, in partnership with Pepperdine Private Capital Markets Project, have set a goal to provide quality information relating to M&A transactions.  This data is from the 2016 Q4 Market Pulse Survey.

In this month’s report, we will look at:

• Final Price vs Asking Price
• Median Multiple Increases
• Common Multiple Ranges
• Sales by Industry

With political surprises around the globe, 2016 was a volatile year.  The year’s total spending of about $3 trillion was significantly lower than 2015’s record $5.03 trillion, yet 2016 remained the third-best year of the last decade per Bloomberg’s Dec. 20^th, 2016 report.

Craig Everett, PhD, and Director of the Pepperdine Private Capital Markets weighed in with the following quotes:

“Small business optimism is on the rise, following the election. If President Trump can follow through on his commitment to lower taxes and create a more business-friendly climate, we should see increased activity in the market,” said Craig Everett, PhD, Director of the Pepperdine Private Capital Markets Project. “If the corporate tax rate drops from 35% to 15%, as Mr. Trump has proposed, businesses will have more capital to push into expansion and acquisition.”

“What’s more, Mr. Trump wants to offer a special tax repatriation holiday, dropping the rate to 10%. This could bring billions of dollars back to the U.S.” continued Everett. “Some of that could be spent in the lower middle market, making strategic buyers a real force to be reckoned with in terms of buying power.”

WHERE ARE BUSINESS VALUES TRENDING?

Year-over-year, final sale prices remain fairly consistent as a percentage of the pre-set asking price or internal benchmark.  However, advisors reported a premium for deals valued at $5 million and above.  There appeared to be about a 20% premium in the fourth quarter, over deals of a similar size last year. (see Figure 1 Below)

Figure 1: Final Price Realized Versus Asking Price

Multiples continue to remain strong in all categories, demonstrating a relative plateau in the Main Street market.  Year-over-year, multiples saw the biggest gains in the lower middle market, a likely sign of the continued appetite of Private Equity Groups and Strategic Buyers. (see Figure 2 & 3 below)

Figure 2:  Median Multiple Increases for Businesses

Figure 3:  Common Multiple Range

Working capital is an issue that tends to be confusing for buyers, sellers, and inexperienced M&A Advisors.  Smaller deals tend to not include working capital, but lower middle market deals typically include working capital.  Many M&A Advisors do not take this into account, and thus, determine list prices that can be drastically off.  This typically either costs the seller money, or ends up causing the price of the business to be well above market value, which can turn buyers off.  Because of this, it is critically important that you choose your M&A Advisor wisely.  See figure 4 below for recent multiple types and working capital breakdown.

Figure 4:  Deal Size & Most Common Multiple

*SDE - Seller Discretionary Earnings

*EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

Looking at data for the entire year, restaurants, personal services, and consumer goods led the Main Street market in 2016.  In the lower middle market, manufacturing was the standout leader at 30% of all reported transactions, followed by construction and wholesale/distribution.  (see Figures 5 & 6 below)

Figure 5:  Hot Industries - Main Street

Figure 6:  Hot Industries - Lower Middle Market

The outlook is also positive for 2017, as 74% of advisors are expecting an increase in new clients coming to market this year.  While the anticipation is to remain strong, advisors aren’t optimistic that multiples will climb any higher in 2017.  Advisors also suggest market conditions will remain relatively neutral when it comes to debt financing.  However, they support some difficulty arranging financing for companies with revenues of $100,000 or less.

Thank you for reading our Monthly M&A Snapshot.  Please email us at [email protected] or visit our website www.LegacyMergers.com if you have questions or would like additional information.