MarketPulse survey sheds light on buying trends
by John Howe
A theme emerged in the most recent MarketPulse survey of intermediaries in the lower mid-market: companies continue to expand through acquisition, both to gain market share and to add qualified personnel.
While growing market share seems obvious, continued tightening of the labor market across the country is another motivator. As David Ryan of Upton Financial Group in California observed: “...acquisitions present an efficient way to land a trained and established labor force.”
Several other key points include the following:
- Most deals during the last quarter involved a multiple of EBITDA* and included working capital left in the company.
- Common multiples in the $2-$5 million sector are 3.5 to 4.5 times EBITDA.
- In the $5 million and up sector, multiples are in the 4 to 5.5 times EBITDA range.
- Time to close, 8 to 12 months
- 51% of transactions were to existing companies and strategic buyers
- Manufacturing and business services are the hottest market
While buyers are eager to do deals, the inventory of available companies continues to lag.
Jeffrey Mortimer, an investment strategist at BNY Mellon, spoke to AMAA in Boston recently on valuation trends. Put simply, he said owners thinking of selling should pull the plug now while demand is strong and capital is plentiful. He based this on his view of the normal cycles on the stock market which are approaching an historic high point.
MarketPulse is a survey conducted quarterly by The M&A Source in conjunction with the International Business Brokers Association and Pepperdine University Private Capital Markets Project.
*EBITDA represents earnings before interest, taxes, depreciation and amortization. Though valuations may use other factors, such as sales or gross profit, EBITDA dominates. It is considered a good gauge of how a company would operate under new ownership by an investor or another company.
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Case Studies
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Precision Machining Company
Initially, liquidation was a serious consideration. It would offer a quick exit but would hurt loyal employees and disrupt the customers who had come to rely on its quality production.
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Green Product Company
Our client owners could dig in for the long haul…However, this would take five years or more. Owners simply lacked the horsepower to do it.
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Water Purification Company and Young Buyers
Owners decided they wanted to retire. They also wanted to be fair to the staff who had been loyal to them. Could the company be sold, the staff retained and the facility remain in use?
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Magnetics Company with High Profile Customers
(T)he manufacturer would need to focus on growing EBITDA to capture interest from major strategic buyers and achieve a higher multiple of earnings.