What’s Your Company Worth? The Latest Valuation Trends on Middle Market Companies

Posted on: October 19th, 2017

Middle Market Companies valuation Aggregate M&A volume for the first half of 2017 is down from 2016. Notwithstanding the decline in volume, purchase prices are about even with last year with the average multiples of 10 times EBITDA for the first two quarters vs 10.3 times for FY 2016.

More broadly, average multiples have increased 20% since 2010, when the average multiple was 8.1 times. There has been less activity in the mega-market sector with blockbuster deal sizes, and more rotation into the middle market sector where deal sizes range from $10 million to $500 million.

As larger cap market players enter the middle market, there is more competition for deals and higher prices being paid for middle market companies. In addition, there is an abundance of debt players in the market looking to aggressively lend into most deals.

The level of activity has created momentum in the middle market with most investment bankers and debt advisors busier than they have been in years. In fact, it appears that exit is on the minds of many middle market business owners.

According to a Citizens Bank survey more than half of the middle market is either currently involved in or open to selling in 2017. From 2016, there was an increase in selling activity.

Those involved in selling rose from 10% to 16% in a year’s time and the amount of businesses open to the idea of selling jumped from 24% to 38%. Overall, M&A receptive firms increased from 34% to 53% of the market, which is an astonishing increase of 55%.

Keep in mind, this doesn’t mean that all are in condition to be sold. They’re just not opposed to it.

But is certainly is a good time to explore the current valuation of your business and to make sure you are in control of your Company’s value drivers. In times like this is pays to do three things:

Make sure your financials are in good shape – Whether you sell now or down the road, you will get a higher price, just by having more professional financial statements.
Growth, Growth and more Growth – When selling, a buyer is always looking for a reason to renegotiate. Showing growth and increased profits during due diligence is the best way to prevent price renegotiation.
Do valuation homework – find out what buyers are offering by having conversations with brokers and potential buyers. Yes, those brokers and potential buyers that are always calling you and saying they will pay big bucks for your business. While your natural reaction may be to avoid such calls, you can learn a lot from dialoguing with these folks as they are in the market and have valuable intelligence on deals and prices.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.