Generally favorable market conditions for private business sellers continued to prevail in the third quarter, according to GF Data’s just-released November report.
“If this protracted sellers’ market were a song, it would be ‘Still the Same’,” said Andrew Greenberg, the CEO of GF Data. “If it were a movie, it would be ‘Frozen’ and if it were a book, it would be ‘Still Life With Woodpecker.’ No material change.”
GF Data’s private equity contributors reported on 50 third-quarter transactions with total enterprise value (TEV) between $10 million and $250 million and TEV/EBITDA multiples of 3 to 15 times.
“Valuations for the quarter averaged 7.4x, which is at the upper end of the 7.1x to 7.4x range that has characterized the market since the second half of 2017,” added Mr. Greenberg. “That is not to say all businesses are valued as they would have been 18 months ago – we see fewer desirable sectors losing some altitude and more desirable sectors finding new headroom. But in aggregate, multiples are remaining on an elevated plateau.”
GF Data’s third-quarter report suggests favorable conditions are reaching more selling businesses in the smallest deal size tier. “The average valuation mark in the $10 million to $25 million TEV bracket is 6.2x for 2019 year to date,” said B. Graeme Frazier, IV, GF Data’s co-founder and principal. “This is on the high side, but it’s even more notable that the average for deals of that size with favorable pricing is nearly a full turn higher at 7.1x.”
“Smaller deals generally experience a double discount – marked down for size, and then less likely to be rewarded for factors like above-average financials, continuing management or institutional ownership prior to sale,” added Mr. Frazier. GF Data’s third-quarter report also states that the accommodating debt market is reaching more of these smaller firms. “Total debt at $10 million to $25 million is 4.0x in the year to date – not far off of the 4.1x average for the entire sample,” concluded Mr. Frazier.
According to Holly Huels, a managing partner Holleway Capital Partners, deal flow for lower middle market acquisition opportunities remains strong. “Age and other life circumstances are continuing to drive small business owners to seek liquidity for what is typically their largest asset. While these smaller companies are often not as ‘clean’ as companies a bit larger, the competition for smaller transactions continues to hold valuations at a high level,” said Ms. Huels.
GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders, and other users. The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis. The pool of active contributors comprises 202 private equity firms, mezzanine groups and other financial sponsors. Data contributors and other subscribers receive five products:
1. A quarterly report containing high-level valuation, volume and leverage data;
2. A quarterly supplement offering detailed information on debt and capital structure trends;
3. A semi-annual supplement on indemnification cap, escrow, and other details;
4. Quarterly industry drill-down reports; and
5. Continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.
For information on subscribing or on contributing data as a private equity participant, please contact Bob Wegbreit at bw@gfdata.com or 610-616-4607.