Reviewing recent reports on deal activity for 2012 indicates a lower deal flow than 2011. Pitchbook reports the 660 private equity deals in the first half of 2012 is the lowest reported since 2009. These are deals with company revenues mostly in excess of $10 million. Similar deal flow is evident in the small and lower middle markets as Pratt Stats also reports fewer sales.
Reasons for Lower Deal Flow
Reasons given include the volatile economic situation in Europe and its possible impact on the U.S. economy, as well as uncertainty around the election and future tax rates. There are however anecdotal reports of a backlog of deals waiting to get done before year end. In addition, most professionals expect 2013 to see an increase in acquistion activity. In a survey of corporate development professionals, Axialmarkets found that 83% expect to make an acquisition in the next 12 months. In addition, private equity groups have over $400 billion of funds available to invest. Most of this will be employed in the middle and larger market, however the market for small and lower-middle market companies also looks to benefit from an increasingly large pool of investors, strategic buyers and mini-equity groups.
Business Valuations Results
Business valuations or multiples of ebitda (earnings before interest, taxes, depreciation and amortization) show a mixed bag of increases and decreases depending on the industry versus 2011. For example, construction continues to improve from its low in 2010 while retail is currently on track for a new low. Construction deals reported by Pratts have a median ebitda multiple that is up 50% over 2010. Of course a lot of deals will be booked before the full year data is available, and these could change. As always, care must be take in reading too much into compilations of data, especially averages. For instance year-to-date data reported by Pratts show average revenue of $2.2 million but only $465,000 median revenue. This means their population of deals includes many small deals and a few middle market deals. The data is interesting but we do not recommend business owners or their advisors apply these to their business. Many factors go into a buyers valuation and no two businesses are alike. Following are the ebitda multiples reported so far(mostly 1st half 2012) this year:
Revenue EBITDA Multiple
$1-$5 million 3.4
Over $5 million 4.6
Under $25 million 6.0
$25 – $50 million 6.8
$50 – $100 million 5.5
Over $100 million 8.6
Notice the valuation dip at $50 – $100 million. This has nothing to do with size and everything to do with the industry and deal mix at that size in 2012. We omitted the data for deals under $1 million revenue as these are almost always a multiple of owners cash flow which is a very different metric versus ebitda. Contact a professional M&A Specialist or Business Broker to learn how your business might be viewed by the business buying market.