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.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.