Lingate 2018 mid-year M&A update, High valuations continue to hold

Lingate 2018 mid-year M&A update, High valuations continue to hold

The record M&A market for companies valued under $50 million continued to roll in the first half of 2018. The headline of the Associated Press article that appeared in the July 30 Minneapolis StarTribune said it all, “Hot item for sale at small companies: The business itself.”  Most M&A professionals, including those of us at Lingate, agree this is one of the most active markets in the past 20 years.  For the key market drivers, the lights are still green for company valuations, investment capital, interest rates, US GDP, unemployment and tax rates.  The M&A industry consensus is that we continue to be at the top of the market.

Valuations remain high and are holding, but not all businesses are receiving the same multiples of earnings.  The survey by Pepperdine Private Capital Markets Project sited in the Associated Press article said that for the first three months of 2018, the average purchase price was 6.1 X EBITDA (earnings before interest, taxes, depreciation and amortization) for companies valued at $5 million - $50 million; impressive indeed!  But beware of averages, because we’ve yet to see an average company.  Smaller companies with EBITDAs less than $1 million are selling for a multiple earnings much less than companies with EBITDAs greater than $5 million.  Visualize a flight of stairs, rather than a straight ascending ramp.  Multiples of earnings tend to go up a step when companies achieve earnings of $1 million, $5 million, $10 million, etc. This stair step effect reflects a significant reduction in perceived risk by Buyers when purchasing larger, more profitable companies.  Manufacturers, distributors and professional services firms also sell for different multiples of earnings because of the differing amount of leverable capital assets utilized in the companies.  Here’s the key takeaway: Valuations have peaked yet still remain high, but the price multiples can vary significantly due to the size and type of company. We’re happy to share more tailored information with you.

Get started now on internal transitions to close by the end of the year

Don’t wait to the last minute if you are planning an internal transition to close at the end of 2018.  Even if planning to transition to a family member, partner or management team member, the details and paperwork can still take three months or more, particularly if real estate or an outside lender is involved.  Our best advice is to start talking with your team now – your buyer, accountant, attorney, banker and financial advisor - to set a closing date so each key team member can begin working on their tasks to meet the deadline.  Lingate can help with valuation and process facilitation if needed.

Please contact us if you need some help understanding the current market for you company or need some help with an internal transition, acquisition or sale.