Surveys of deal professionals covering business sales completed in the first three-quarters of 2015 show that business valuation multiples are drifting downward. The number of new deals coming to market has declined. Reasons for the decline in new deals and valuation multiples are unclear; however, completing deals requires confidence in the future. After rising for several years since 2009, the S&P 500 leveled off in 2015 and experienced a notable decline in the third quarter. Buyer activity remains very strong, and more recent economic data indicates the overall economy is in good shape. Perhaps reflecting this, deal professionals are reporting an uptick in businesses expressing an interest in selling. The consensus is deal values will remain steady, and any declines seen in 2015 data are not significant enough to indicate a trend.
The market is generally segmented between small deals under $1 million, lower middle market deals between $1 million and $20 million, and mid-market deals up to about $100 million. The lower end of the market is where deal multiples show slight declines, while multiples are steady or increasing in the upper end. The economy has been expanding for 77 months, going back to June of 2009. Early in an expansion, investors are more confident about the near and middle-term future; however, as expansions reach historic lengths, investors become more cautious. We believe this thought process is beginning to weigh on the deal market even though the effect is small and mitigated by a still-robust economy. Therefore we believe the atmosphere for business sales will remain strong for the foreseeable future, however, the run-up in deal multiples is probably over.
The relationship between higher company revenue and profits and higher deal multiples remains in place. For the first half of 2015, most deals over $2 million fell between 3 and 5.5 times EBITDA. However, 20% exceeded 6x, and three deals were over 10x. For those looking for the highest multiples, it is worth noting that these high flyers exhibited either high synergies with the acquiring company or they were in high growth mode.
The AMAA survey shows deal multiples declined in the first half of 2015 from the second half of 2014. However, this continues a trend as this is the sixth year in a row where this tendency has been recorded. This again confirms the need to not read too much into short-term declines.
The IBBA/M&A Source/Pepperdine University studies have consistently shown an increase in individuals buying businesses in all segments. Two years ago, individual buyers accounted for only 13% of deals valued between $2 and $5 million. For Q3 2015, their share rose to 50%. In this same segment, private equity accounted for a reduced share while strategic buyers increased slightly. The confidence of individual buyers is critical to the lower end of the market where individuals make up a majority of buyers. At $5 million deal value and above, individuals are generally not nearly as big a factor as private equity and strategic buyers.
Our internal evidence and industry surveys indicate the run-up in values and exuberance may have plateaued as the economic expansion matures. However, it appears the economy and market for business sales is strong and will remain so for the foreseeable future.
Don’t hesitate to contact BMI for more detail on the state of the business sales and mergers and acquisitions market or learning about a specific industry.