25 Sep Seller’s Market for Private U.S. Businesses
Tulsa World | Business Viewpoint with David L. Perkins, Jr.
Thursday, September 25, 2014
Prices being paid for the purchase of private U.S. companies are as high as any time in recorded history. How can this be? Let’s count the ways:
- Equity capital is abundant and with few high return alternatives
- Debt capital is widely available and cheap
- Buyers, of all types, are plentiful and aggressive
- Number of business sellers are surprisingly low
Values have robustly recovered from the recessionary lows of 2009 and 2010. According to GF Data, the average price paid in the most recently completed year (2013) — for private business sale transactions in the $10 million to $250 million range — was 6.7x EBITDA (earnings before interest, taxes, depreciation and amortization). By way of comparison, multiples reached just 6x for this same size range in the bubble years of 2005, 2006 and 2007.
Yes, $10 million to $250 million is a wide range, so let’s break it down. For transaction values between $10 and $25 million, the average last year was 5.9x EBITDA. Transactions in the $50 to $100 million range were 6.7x. The difference is referred to as the “size premium.”
Companies with above-average growth, profit margins, profit stability, management and financial statement quality sell for a little more. Companies that don’t possess these desirable characteristics sell for less.
Values vary by industry as well. Companies in the technology and health care spaces are selling for prices a little above the average. Service and non-proprietary manufacturing businesses tend to sell for a little less.
Overall, the higher prices being paid for businesses today are made possible — to no small extent — by the availability of low-cost debt. Debt capital as a percent of total price paid — for deals completed in the $10 million- to $250 million- transaction value range — rose to 57 percent in the most recently completed quarter (ending June 30) of 2014 (senior and sub-debt combined). In recent years, it’s been around 47 percent to 50 percent.
Total debt as a multiple of EBITDA – for all transactions in the $10 million to $250 million range – averaged 3.9x, up from an average of 3.4x in recent years (2011 through 2013).
This data is provided by GF Data Research, which reports on U.S. transactions completed by participating private equity groups.
Interestingly, the number of closed private business sale transactions remains low.
Will prices remain high? Of course not. Some of the most recent data suggests a pull back. Whether a pull back is already taking root or not, however, is anyone’s guess. But one thing’s for sure: interest rates can’t go down much more. And an increase in the cost of debt capital will put a drag on multiples.
How can a particular seller maximize the sale price of all or a portion of her business? The answer is simple: “work” all of the best buyer candidates simultaneously, with urgency.