As we enter 2020, the amount of potential M&A deals is expected to accelerate. Multiples remain strong (and unusually high for the best companies), averaging nearly 7.5 times trailing adjusted EBITDA for transaction values from $10-$250 million. EBITDA between $7 to $10 million often corralled multiples in the 10 to 12 range.
The above numbers, while interesting, do not tell the whole story. What are the most pertinent factors which bear on multiples and deal pricing? We offer a few of them below:
- Different industries trend very differently. For example, software is usually in vogue. More specifically, healthcare and educational software is hot, as is SaaS. Many of these deals are priced as a multiple of revenue, particularly for ones with a recurring revenue component.
- The inclusion of valuable real estate owned by the company usually alters the multiple. Balance sheet cash and cash equivalents not needed for normal working capital reflects differently in terms of multiples.
- The life cycle of private equity funds can cause value fluctuations higher than the norms.
- Technology breakthroughs may be priceless. Well, not so much, but definitely heighten the multiples in a market or segment of a market.
- The availability of senior debt and pricing spreads applied to a particular buyout may alter the leverage and the multiple.
- Other considerations germane to deal values and terms are:
- recent growth spurts in revenue that appear sustainable
- intellectual property (IP) component of a deal
- size and diversity in customer base
- management remaining in-place
- business culture
While difficult to ascertain from published transaction data, we look beyond the average multiple to apply a range for each specific seller. Better yet, implement as much of the value drivers available to you as a seller before you decide to exit.