No one can argue that the M&A market for sellers in 2018 is as good as it has been in recent history. There continues to be far more buyers than sellers and valuations are frothy. For several years, this scenario has not changed, but we may start to see some adjustments.
As we look at 2018 data to date, there are a few trends being reported by GF Data that make us question if the tides are changing. GF Data is a service that provides proprietary data on private equity-sponsored M&A transactions with enterprise values of $10 million to $250 million. Here is a look at data we are watching closely:
Overall deal multiples, which drive transaction value, are calculated as the total enterprise value (TEV) divided by the earnings before interest, taxes, depreciation and amortization (EBITDA). In 2017, they reached an all-time high of 7.3x. Average multiples in 2018 through the second quarter retreated back to 7.0x. For reference, average multiples from 2003 to 2017 ranged from 6.1x to 6.8x.
Smaller deals with enterprise value between $10 million and $25 million saw a valuation flurry in 2017 with average multiples of 6.4x. For the first two quarters of 2018, we see valuations have come back to earth, averaging 5.9x.
Overall deal multiples for manufacturing businesses have held steady since 2017, but deal volume is down significantly. In 2017, they saw an average of 6.9x; in 2018 through Q2, multiples averaged 6.7x.
High-quality businesses are demanding even higher pricing. The “quality premium” refers to those businesses whose EBITDA margins over the trailing 12 months (TTM) and revenue growth rates both are above 10 percent, or one metric above 12 percent and the other metric at least 8 percent. In 2017, the quality premium reward translated to 21 percent higher EBITDA multiples and in 2018 the quality premium jumped to 24 percent.
So what does this mean for a Wisconsin business? Nationally, we have seen reports of a softening market. This softening does not seem to have affected our local market and we expect the Wisconsin market to remain strong.
Fortunately, we are enjoying a robust economy and major development in the state which will continue to feed our businesses.
In addition, buyers love Wisconsin. Buyers from both coasts have come to discover that Wisconsin is ripe with well-run, conservative business operations. We offer a business-friendly climate and have a better labor market than most states.
Wisconsin was ranked one of the Top 10 states for businesses according to“2017 Best States for Business” ranking by Chief Executive Magazine. Although Forbes contradicted this, ranking us at No. 33 for Best States for Business, they did rank the state No. 9 in Quality of Life, which only strengthens the business climate by attracting quality employees to the area.
We will continue to keep close tabs on the M&A markets both nationally and in Wisconsin.
For additional insight, attend the upcoming Mergers & Acquisition Forum: Fact or Fiction, Taking the Mystery out of M&A on Oct. 16 in the Fox Valley.
About the Author
Managing Director and Owner, Taureau Group
Ann Hanna, MBA, CPA, is Managing Director and Owner of Taureau Group, a full-service boutique investment banking practice providing merger and acquisition services to guide privately held, middle-market companies through a complete transaction process. Ann is a licensed investment banker and real estate broker with a distinctive background that includes more than 20 years of C-level management experience, including involvement in multiple corporate start-ups.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Insight Publications, LLC.