By Asif Charania, CPA/ABV/CFF, ASA, Partner, Valuation & Forensic Practice Leader
By Asif Charania, CPA/ABV/CFF, ASA | Valuation and Forensic Services Senior Manager
2018 Year-End Review of M&A Market Trends
Over the last five years, the M&A markets have been fueled by an increased access to capital and improving economic conditions. Overall deal multiples have increased consistently over this period, despite some analysts having concerns that the markets may be facing a correction or a potential economic downturn.
Common Valuation Multiples
One of the most common valuation multiples includes MVIC/EBITDA. MVIC is an acronym for market value of invested capital. EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization, and is also a proxy for operating cash flow.
Transaction activity and related deal multiples can vary greatly depending on the size of the business, economic conditions, industry conditions, interest rates, and political factors (i.e. political tensions between opposing parties). To gauge the state of the M&A markets, GF Data® provides transaction statistics on private equity-sponsored M&A transactions with deal values ranging from $10 to $250 million. A summary of MVIC/EBITDA multiples by industry is detailed in the table below. [1]
Industry | 2003-13 | 2014 | 2015 | 2016 | 2017 | YTD 2018 | Total | N = |
Manufacturing | 5.9 | 6.1 | 6.6 | 6.1 | 6.8 | 6.9 | 6.1 | 1286 |
Business Services | 6.1 | 6.1 | 6.4 | 7.3 | 7.4 | 7.0 | 6.4 | 572 |
Health Care Services | 6.8 | 7.2 | 7.8 | 7.6 | 8.1 | 7.5 | 7.2 | 284 |
Retail | 6.4 | 6.0 | 5.5 | 7.0 | 7.6 | 6.7 | 6.5 | 96 |
Distribution | 6.0 | 7.2 | 6.7 | 7.5 | 7.7 | 7.0 | 6.4 | 304 |
Media & Telecom | 7.2 | NA | 6.4 | 6.6 | 8.2 | 5.0 | 7.1 | 49 |
Technology | 6.6 | 7.7 | 8.0 | 7.4 | 10.2 | 9.8 | 7.6 | 97 |
Other | 5.8 | 6.6 | 5.6 | 6.9 | 6.5 | 6.9 | 6.0 | 325 |
N= | 3013 |
Source: GF Data ®
Please note: N for 2003-13 encompasses 11 years of activity.
As is indicated in the table above, EBITDA multiples ranged from 5.0x to 9.8x in 2018, with an average multiple of 7.3x. Moreover, businesses in manufacturing, business services, health care services, and distribution comprised approximately 80% of the transactions noted above. According to GF Data, growth in transaction multiples remained flat between 2017 and 2018 primarily due to concerns about economic cycles, interest rates, and trade policy. While this trend may be concerning for some sellers, it remains a good opportunity for buyers.
GF data also notes that the level of debt financing used in acquisitions has trended downward from a peak of 4.4x (total debt/EBITDA) during the 3rd quarter of 2017 to 3.8x for the 3rd quarter of 2018. While debt availability remains plentiful, acquirers are choosing to capitalize transactions more conservatively.
Proceed with Caution
The multiples noted in the charts above are based upon an average of several thousand transactions. Therefore, blindly applying these multiples to a particular business might not be appropriate. However, these multiples may serve as a starting point for particular transaction, but will need to be adjusted for a particular company’s facts and circumstances (e.g., growth expectations, industry conditions, and overall company risk profile).
How Can Keiter Assist?
Keiter guides privately-held businesses in analyzing and coordinating all aspects of the transaction so that the results are most favorable. By working with clients at an early stage, we are able to understand their business and help identify specific needs. We help sellers in maximizing value and assist acquirers in ensuring the acquisition is a good fit for their organization and the owner’s goals.
Maintaining the structure of a transition so that it is tax efficient is one of our top priorities. Our approach minimizes net cash outflows for a purchaser and maximizes net cash received by a seller after taxes.
Through our relationships with investment bankers and other centers of influence, we connect clients with additional expertise in mergers, acquisitions, and divestitures.
If you are in need of business valuation services and are considering various experts, please contact your Keiter representative or the Keiter Valuation and Forensic Services team. We are here to help.
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[1] GF Data M&A Report – November 2018. Conshohocken, PA: GF Data Resources, LLC, 2018
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.