BY STEVEN PAPPAS, PARTNER, M&A MI M&A ADVISOR
If you’re a seller of a business, the M&A market continues to be in your favor. Multiples are still at near all-time highs and deal terms remain advantageous to the seller. These facts are from recent data provided by GF Data, a research company focused on capturing and analyzing private equity sponsored transactions with enterprise values between $10 to 250M. The Market Pulse report from Q2 2019 supports these findings.
EBITDA MULTIPLES – Figure 1 shows the most recent Q2 2019 average multiple of EBITDA which is second to only Q4 2018 regarding a multiple high of 7.6x vs 7.8x. Even if you average out Q1 and Q2, you will get a 7.2x multiple for all businesses from $10-250M in all industries. Keep in mind the multiples vary greatly by industry and deal size.
SIZE MATTERS The chart in Figure 2 provides a breakdown of Q2 2019 multiples as it related to TEV (Total Enterprise Value). It is no surprise that the larger the company the higher the multiple with businesses in the $100M- 250M range trading at an average of 9.5x EBITDA.
DEAL TERM TRENDS Other important indicators are deal terms, specifically Indemnification Cap and Escrow/Holdback.
In Figure 3, the chart shows the average cap on indemnification against breaches of reps and warrantees was 9.8% for 2019 YTD (Q1 and Q2). This is down from 15% in 2018 and 12.1% 2017. This indicates a trend that continues to be favorable to sellers this year. You will see that the smaller the deal size, the higher the cap percentage. However, note that depending on the industry the caps on reps and warrantees will vary greatly. These are averages across all sectors, nevertheless, the trend continues to be lower.
Another deal term key indicator is the escrow and holdback percentages. The chart in figure 4 shows this also is favorable to sellers with lower percentage of transaction value held in escrow. The average across all size deals for 2019 YTD was 4.0% with 2018 at 5.1%. Buyers want to get deals done and making concessions on escrow and holdbacks is something that they will negotiate down if necessary. This, too, is deal size and industry sensitive.
If you are thinking about selling your business, consider this information when deciding if it’s time to take that first step. Touchstone Advisors can help you navigate the latest market information and show you how to fully benefit from a seller’s market.
STEVEN PAPPAS, PARTNER, M&A MI M&A ADVISOR
DIRECT LINE: 860.669.2246