Valuation Trends for the Small to Middle Market

Posted on 12.18.17

Valuation Trends for the Small to Middle Market

3rd Quarter 2017 Update

Over the last five years, the M&A markets in the U.S. 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 include MVIC/EBITDA and MVIC/Revenue. 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.

Deal multiples can vary greatly depending on the size of the business, industry conditions, and political factors (i.e. tax and healthcare reform). The small market typically refers to companies with less than $10 million in revenue. A summary of valuation multiples for various industry sectors in this lower-tier market, prepared by Pratt’s Stats,1 is presented below. As is indicated, the range for MVIC/EBITDA multiples was 3x to 4x in 2017. Furthermore, multiples in this market have steadily increased between 2012 and 2016, but are starting show a downward trend through the 3rd quarter of 2017.

Companies in the middle market, typically with revenues between $10 and $250 million, tend to transact for larger multiples as these entities are expected to experience higher growth and cash flow, and are typically targeted by larger buyers (i.e. public companies) or private equity groups that will pay additional premiums for synergies. A summary of EBITDA multiples by industry sector for middle market companies, prepared by GF Data,2 is detailed in the chart below. As is indicated, the range for MVIC/EBITDA multiples was 6.6x to 9.0x in 2017.

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).

Questions on this topic or other business valuation concerns? Contact your Keiter representative or our Valuation team. Email | 804.747.0000


Sources:

  • 1 Pratt’s Stats Private Deal Update - 3Q 2017. Portland, OR: Business Valuation Resources, LLC, 2017
  • 2 GF Data M&A Report – August 2017. Conshohocken, PA: GF Data Resources, LLC, 2017
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.

Posted by: Asif Charania, CPA/ABV/CFF, ASA

Asif Charania conducts business valuation services for purposes of financial reporting relating to business combinations and goodwill impairment testing; litigation and shareholder disputes; estate, gift, and income taxes; mergers and acquisitions; employee stock ownership plans; transfer pricing; reorganizations and bankruptcies; marital dissolution; buy/sell agreements; and appraisal reviews. He has experience valuing complex securities such as preferred stock; convertible preferred stock; and employee stock options, warrants, and stock appreciation rights.

He serves clients in a variety of industries including technology, financial, construction, healthcare, retail trade, manufacturing, distribution, wholesale, government contracting, and professional services. Read more of Asif’s insights on our blog.

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