Middle market valuations have remained high throughout 2018. For deals between $10-$250 million, the latest report from GF Data notes TEV/adjusted EBITDA multiples averaged 7.4x during Q2 2018 consistent with valuation multiples from Q2 2017. As noted in our earlier analysis, deals in general are trending upward, including transactions in the middle market. Strategic acquirers may be wondering how rising valuation multiples affect their acquisition program.
Average Multiples ≠ Your Deal Multiple
Although the market does play an impact, valuation is greatly influenced by company and industry-specific drivers. Remember, these are average deal multiples and the trend may not apply to every business. A trend of rising average valuation multiples does not necessarily mean you must plunk down more money for a deal to close. You may choose to do so in order to beat out a competitor or because you believe in the strategic value of the deal, but it is certainly not a guarantee. In determining price, you must both take into account valuation, including market multiples, as well as evaluation – nonfinancial factors – that influence your decision.
Educate Sellers About Valuation
At the same time, sellers will likely be influenced by what they read in the news and may believe their business should sell for a 7.4x. One of the best ways to bridge this valuation gap is to educate sellers, many of whom do not have extensive experience with mergers and acquisitions. Have a formal valuation conducted on the company to get a better grasp on what it’s worth both to you and the seller. Valuations can be illuminating to sellers, and oftentimes work in your favor to manage unreasonable multiple expectations.
At the end of the day, regardless of what’s happening in the market, acquirers should always weigh every decision, including price, against their strategic rationale to ensure a successful transaction.
Learn more about valuation in our webinar on September 20, “The Basics of Business Valuation for Mergers & Acquisitions”
Date: Thursday, September 20
Time: 1:00 PM EST
CPE credit available.