by Ken Schaefer
Pitchbook™ has published a survey exploring private equity (PE) buyout multiples and trends. I will summarize this and dive deeper into our transaction space ($2M-$10M deal size), and what it means for business owners contemplating a future exit.
More and more PE firms are searching for smaller transactions. The reason for this is simply competition. The PE marketplace is awash in funds as more retirement funds, hedge funds, and endowments search for higher returns. While accredited investors are still very active in private equity, the combination of institutions increasing their investment base, and the fact that the number of public companies traded on the two major exchanges has shrunk by approximately 50% in the last twenty years contribute to this uptick in activity and broader searches.
“Headline” mergers – those transactions that attract attention in the national media and financial news trade at very high multiples- very close, or in many cases, the same multiples as publicly traded markets. Pitchbook™ reports that transactions under $25M average change hands at six times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), compared to an average of eight times EBITDA for transactions between $25M and $100M), and for each deal size range the multiple increases.
In the transaction space we occupy ($2M to $10M), typical EBITDA multiples range from 3 times to 4.5 times. These are averages, and we have completed transactions as high as eight times EBITDA. This illustrates the strategy of private equity firms at all levels: execute a transaction at the current market EBITDA multiple, grow the business over a three to seven-year period with additional capital and expertise, and exit the transaction at a higher multiple range, often to a larger investment group, a strategic acquirer, or less often via an IPO.
Typically about 50% of our transactions are with private equity firms. We expect this to increase in the future as more and more PE firms explore our transaction space. These firms in most cases wish to have the selling owner continue with the company for a few years to provide stability and continuity. This is why we advise owners of companies to think of a sale earlier than they have to in order to provide time for this kind of transition.
 Pitchbook™ -Exploring Buyout Multiples. June 26, 2017
 Pratt’s Stats accessed June 27, 2017
"The entire process went smoothly and professionally. The BTS team kept me fully informed at every step. They worked hard and were effective in bringing the deal home."
"Skip and I continue to be grateful for all you have done to make the sale of Pure Flow come to fruition."
"BTS’s level of expertise in the process and close attention to detail enabled us to successfully navigate the deal."
"These types of transactions are often long and complicated and I doubt it could have been successfully completed without your close ongoing involvement."
"The outside objective point of view that you have brought us has been invaluable as we prepare for the rapid growth."
"John then found the right buyer and coordinated a seamless transition—he doesn’t miss a single detail."
"John immediately identified our strengths and experiences and discussed a business that ultimately was more in line with our goals."
"The BTS team came in, evaluated everything in a professional and thankfully non-threatening manner."
Good Options for Owners: ESOP versus Third Party Sale
Taking the ESOP route is not an all or nothing approach to business ownership transition.
Private Equity Trends
More and more PE firms are searching for smaller transactions. The reason for this is simply competition
Using a Specialist in M&A
While using an industry specialist to market a company may save a few days in preparing the offering materials, there is the danger of a cookie-cutter approach.
Legal Breakfast Series: How I Sold My Company - A Case Study
Attorney Peter Burger and John Howe of Business Transition Strategies will be the featured speakers during the latest Orr & Reno Legal Breakfast Series on Wednesday, June 14 at the Orr & Reno offices
What's Next Really Matters
The book explores the exits of owners ranging from the good to the bad, from the joyful to the ugly...Often overlooked is the reality that after the closing, everything will be different.
Staying Current to Help Clients
Twice a year we attend a deal expo with private equity groups and strategic buyers...Connections made at this event broaden our list of people who will take our calls, answer our questions, help when
Overcoming Fear of Public Speaking
Communication skills are critical in business, and overcoming fear of speaking is fundamental...it can be the difference between getting a sale or missing out.
P+E+S=EF, a winning formula for Michael Coles
The experience factor is the way a customer feels about a business, and in part determines whether the customer returns or goes elsewhere.
Tailwinds Continue for M&A Deals in 2017
There are good indications that the favorable tailwind continues for M&A activity in the coming year. Key indicators paint a clear picture: buyers are actively seeking opportunities that advance thei
Why Consider a Buy Side Transaction?
There is also a truism when it comes to growth, “It is much faster to grow through acquisition than organically one customer at a time”.
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.
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.
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?
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.