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Market Multiples and Key Deal Points

Through the first six months of 2015, middle market data from over 200 financial sponsors outlines current valuations in what can be described as a ripe “seller’s market.” Compared to a year ago, transaction volume in the first 6-months of the year is up modestly. However, this total fell short of predictions cast by a number of analysts on Wall Street; market conditions seemed to suggest that a record number of business owners would pursue a sale due to market multiples and seller leverage. The third quarter of 2015 represented more of the same for private middle market M&A – or less of the same, depending on what you are looking at. Valuations for the third quarter of 2015 averaged 7.1x, the highest quarterly mark in 13 years.

Buyers continue to pay a premium for larger businesses, which is consistent with historical data. In addition to this ‘size premium’, buyers identified additional key value drivers that they look for when evaluating a potential acquisition. These include: (1) institutional ownership prior to sale, as opposed to individual/family owned enterprises, (2) above-average financial characteristics, and (3) management remaining post-close. Each of these factors individually influenced overall valuation of the company. So, what does that mean? According to private deal data collected by GF Data Resources LLC, on average, a company that meets each of these 3 criteria was valued at 8.4x Adj. EBITDA.

All Transactions

1Q 14

2Q 14

3Q 14 4Q 14 1Q 15 2Q 15

3Q 15

# of Deals

41

53 50 64 63 51

37

TEV/EBITDA

6.4x

6.6x 6.7x 7.0x 7.0x 6.4x

7.1x

Total Debt/EBITDA

3.6x

4.0x 3.7x 3.7x 4.0x 4.0x

4.1x

Senior Debt/EBITDA 2.4x 2.9x 2.7x 2.7x 3.3x 2.9x

3.2x

Deal activity in 3Q represented “more of the same” in the sense that market drivers identified in the first half of the year were as evident or more so in the latest period.

The so-called size premium remained at a near-record level. Deals in the $50-250 million TEV range traded at an average of 8.0x in the first nine months of the year while the average at $10-50 million was 6.3x. The spread of 1.8x compares to a historical average of 1.5x.

TEV-EBITDA-ALL

TEV

 

 

 

 

 

 

 

 

Valuation multiples have increased irrespective of sizes since 2011.

Multiples-byIndustry

The above graphic depicts valuation multiples by industry.

DealValue-and-Volume

M&A deal value continues to rise through H1 2015.

In addition to overall market valuation trends, this report provides data that describe “Key Deal Terms,” such as indemnification cap, indemnification term, escrow/hold back, and escrow/hold back length.  The graphs and charts outlined in this report provide further evidence that we currently find ourselves deep within a seller’s market.

  • The average cap on indemnification of reps and warranties is 12.0% of TEV in the year to date, down from 17.2% in 2014. This figure is 5 percentage points below the average between 2010-2014.
  • The average escrow/holdback in the first half of 2015 was 6.3% of TEV, declining from 7.4% in 2010.

IndemCAP

Indemnification caps in M&A transactions are the lowest in five years.

IndemPERIOD

Overall, indemnification periods have shown a decline.

IndemCAP-by-Industry

EscrowPeriod

EscrowHoldback

SELLER FINANCING / EARNOUT IMPACT – ALL DEALS (2014)

All Transactions No Seller Financing or Earnout Seller Financing or Earnout

 

TEV

TEV/Adj. EBITDA N = Indem Cap TEV/Adj. EBITDA Indem Cap TEV/Adj. EBITDA Indem Cap % of All Deals

10-25

5.4 73 23.9% 5.7 20.5% 5.1 28.6% 45.2%

25-50

6.7 63 14.7% 6.8 14.2% 6.5 15.5%

38.1%

50-250 8.2 69 11.4% 8.1 8.7% 8.8 20.7%

21.7%

Total 6.8 205 17.2% 7.0 14.4% 6.8 22.2%

35.1%

SELLER FINANCING / EARNOUT IMPACT – ALL DEALS (1H 2015)

 

All Transactions No Seller Financing or Earnout Seller Financing or Earnout

 

TEV

TEV/Adj. EBITDA N = Indem Cap TEV/Adj. EBITDA Indem Cap TEV/Adj. EBITDA Indem Cap % of All Deals

10-25

5.9 55 14.9% 6.3 14.9% 5.3 15.0% 40.0%
25-50 7.5 21 12.3% 7.7 11.5% 7.1 13.4%

33.3%

50-250

7.9 33 6.5% 8.2 5.5% 6.6 9.5%

21.2%

Total 6.8 109 12.0% 7.2 11.1% 5.9 13.7%

31.2%

Note: Valuation and “N =” data and are for the entire sample, not just deals featuring indemnification caps.

  • The charts above brings to light some shifts from 2014 to 1H 2015 in the treatment of deals featuring seller financing or earnouts.
  • The incidence of seller financing/earnouts remained consistent across all categories: 40-45% for $10-25M TEV businesses, 33-38% for $25-50M TEV businesses, and 21% for $50-250M TEV businesses.
  • The spread in indemnification cap between deals where seller financing/earnouts were included versus not has narrowed from ~8% in 2014 to ~2.5% in 1H 2015.

KEY DEAL TERM DEFINITIONS

Indemnification cap refers to the general indemnification provided by the seller to the buyer against breaches of reps and warranties. This does not include carveouts for specific issues or items. For example, parties often agree that the general cap will not apply in the event of fraud.

Escrow/Holdback refers to transaction consideration either placed in escrow or retained by the seller subject to events or conditions expected to occur post-closing. For example, the parties may agree to a working capital adjustment based on financial statements that will not be available until after the end of the fiscal period. This does
not include earnouts or other payments payable to Seller post-closing contingent on the selling company’s performance for a certain period post-closing.

Escrow/Holdback Period refers to the time when the last of funds placed in escrow or held back are scheduled to be released.

Download PDF Report Here: Market Report 2015

©2015 The Forbes M+A Group and GF Data.  Use of this information without written approval from The Forbes M+A Group or GF Data Resources LLC is strictly prohibited.