By Claire H. Chadwick, Valuation and Forensic Services Senior Associate and Asif Charania, CPA/ABV/CFF, ASA, Valuation and Forensic Services Senior Manager
Trends for Middle Market Deals
Through the 1st quarter of 2021, private business sellers witnessed what GF Data® refers to as “clear skies, muddy waters.” The COVID-19 pandemic has produced interesting results, which will be further discussed in subsequent sections of this update. According to GF Data®, 74 deals were recorded in the 1st quarter of 2021. 57 deals were recorded in the 3rd quarter of 2020 and 127 deals were recorded in the 4th quarter. This data has been pulled from GF Data’s pool of over 200 financial sponsors.
One of the most common valuation multiples is TEV/EBITDA. TEV is an acronym for total enterprise value. 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 (e.g., trade tariffs). 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 TEV/EBITDA multiples by transaction size is detailed in the table below. 
As is indicated in the table above, EBITDA multiples ranged from 6.0x to 7.9x in the 1st quarter of 2021, with an average multiple of 6.8x for the current YTD period, which was slightly lower as compared to the previous quarter’s average of 6.9x.
COVID-19 Impact on Transactions
GF Data® highlights three areas that explain the recent trends in TEV/EBITDA multiples. Although certain transactions have resulted in values that appear to be equal to or greater than multiples before the pandemic, three aspects cloud these trends when viewed in relation to the overall dataset.
- An unusually large gap between the values of better performing businesses vs. lower performers.
- A rise in add-on transactions instead of initial platform investments.
- An increase in deals that are finalized with seller financing or earnouts (SFEs), which tend to translate to lower valuation multiples.
- Further, the observation of a possible rise in federal taxes in 2022 may cause sellers to lean towards continued negotiations to narrow the divide between the bid and ask. According to GF Data®, these elongated negotiations could result in even more SFEs.
With respect to debt financing, utilization returned to pre-COVID levels. The 1st quarter of 2021 saw an increase in average senior debt/EBITDA multiples from 3.1x in 2020 to 3.7x in 2021. GF Data® notes that this increase in senior debt multiples coincides with the rise in add-on transactions as previously noted.
For further information related to COVID-19 observations on transactions, we recommend reading GF Data’s recent commentary “Deluge of Deals Muddies the Waters.”
Trends for Smaller Deals
Due to the impact of the pandemic on smaller companies, lower-tier deals have experienced fluctuations throughout 2020 and the 1st of quarter of 2021. The average selling price/EBITDA multiples that averaged 4.3x in the 1st quarter of 2020 have fallen to 3.8x for the 1st quarter of 2021. The DealStats Value Index notes that an evident trend is still unclear based on uncertainties like economic policy changes and new variants of the virus. However, as compared to larger deals, transaction multiples for smaller deals tend to be more volatile as the landscape of buyers is significantly different from larger financial buyers such as private equity firms.
Proceed with Caution
The multiples noted in the charts above are based upon an average of several thousand transactions. Moreover, much of the recent data reported is based on transactions that occurred during the coronavirus pandemic. Therefore, blindly applying these multiples to a particular business might not be appropriate.
How can Keiter help?
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, lenders, and legal counsel, we are able to assist clients in developing the required team to complete successful mergers, acquisitions, and divestitures.
 GF Data M&A Report – May 2021. Conshohocken, PA: GF Data Resources LLC, 2021
 DealStats Value Index Digest – 2Q 2021. Portland, OR: Business Valuation Resources, LLC, 2021
About the Authors
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.