Tag Archive for: LowerMiddleMarket

2014 M&A Market: What Deal Multiples Reveal About Business Value

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The 2014 M&A market continued to provide favorable conditions for many middle market business owners considering a transaction. Transaction activity remained strong, while reported valuation multiples increased during the second half of the year.

The Alliance of Merger & Acquisition Advisors (“AM&AA”) represents professionals serving the middle market mergers and acquisitions industry. Each year, AM&AA surveys its membership regarding completed transactions and prevailing market conditions. Through its Deal Stats Transaction Survey, AM&AA gathered information about sell-side transactions completed during the second half of 2014. The survey examined transaction volume and multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

Encouragingly, both average and median EBITDA multiples increased during the survey period. The average multiple increased from 5.52 times EBITDA to 5.64 times EBITDA. Similarly, the median transaction multiple increased from 5.12 times EBITDA to 5.37 times EBITDA. Deal activity also increased, while overall transaction dollar volume remained above historical levels.

The survey reported the following average EBITDA multiples by industry:

  • Construction – 4.87x
  • Manufacturing – 5.68x
  • Wholesale Trade – 6.54x
  • Retail Trade – 6.02x
  • Professional Services – 5.32x

Of note, these industry averages provide useful market observations rather than predetermined valuation benchmarks. Individual companies may transact above or below these multiples based on their specific characteristics. The survey also identified a positive relationship between transaction size and EBITDA multiples. Generally, larger companies attracted higher valuation multiples than smaller companies.

Furthermore, company revenue showed a similar relationship with transaction multiples. These findings reflect the advantages that buyers may associate with greater scale, market position, and organizational depth. More revealingly, AM&AA members identified growth opportunities and buyer synergies as principal reasons for higher EBITDA multiples. Those findings demonstrate why buyers evaluate much more than historical earnings when determining value. A strategic buyer may identify opportunities to expand products, eliminate overlapping costs, or enter new markets through an acquisition. Correspondingly, those opportunities may allow the buyer to justify a higher valuation than another prospective purchaser.

For business owners, the 2014 M&A market reinforces a fundamental principle of preparing for a sale. Strong EBITDA matters, but the quality and future potential of those earnings also influence buyer interest. Owners should focus on sustainable growth, scalable operations, strong management, and defensible competitive advantages. An experienced M&A advisor will then position those attributes effectively within a competitive sale process.

HIKES POINT PAINT & WALLPAPER HAS BEEN ACQUIRED BY DAGES PAINT

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ABOUT THE TRANSACTION:

Hikes Point Paint & Wallpaper (“Hikes Point” or the “Company”) has been acquired by Dages Paint Company (“Dages” or the “Buyer”).

Established in 1976, Hikes Point has developed into a leading independent retailer of premium paint and decorating supplies. The Company operates three locations throughout the Louisville, Kentucky market. Over several decades, Hikes Point has built a strong reputation among professional contractors and do-it-yourself customers. The Company provides premium products, knowledgeable service, and specialized expertise for residential and commercial painting projects. Additionally, Hikes Point has become the largest Benjamin Moore account in the Louisville area. Its established locations, customer relationships, and market presence have supported the Company’s longstanding position within the community.

STRATEGIC FIT WITH DAGES PAINT:

Dages Paint has served the Louisville market since 1930 under its familiar “Keeping Louisville Colorful” slogan. The company is Louisville’s oldest independent paint retailer. For three generations, the Dages family has owned and operated the business. Throughout that history, Dages has maintained a strong commitment to personalized service and product expertise. The acquisition brings together two established independent paint retailers with deep roots in the Louisville market. Both companies have built their businesses around specialized knowledge, customer service, and long-term relationships.

In addition, Hikes Point provides Dages with three established retail locations and an expanded customer base. The transaction also strengthens Dages’ presence among professional contractors and individual consumers throughout the region. Just as significantly, Dages provides continuity for Hikes Point’s employees and customers. The new ownership shares the Company’s emphasis on service, product knowledge, and customer relationships. The combination allows both companies’ established strengths to continue under experienced local ownership. Accordingly, the transaction represents a natural strategic fit between two longstanding Louisville businesses.

ALLSTON ADVISORY GROUP’S ROLE:

Allston Advisory Group served as the exclusive financial advisors to Hikes Point Paint & Wallpaper and its owners. Allston began by performing an Analysis of Value and preparing the Company for the transaction process. The firm then prepared a comprehensive Confidential Information Memorandum presenting the Company’s operations, financial performance, locations, market position, and growth opportunities.

During the transaction, Allston managed the confidential sale process and coordinated communications between the parties. The firm also assisted the Buyer and Seller throughout due diligence and negotiations. A key transaction challenge involved securing sufficient acquisition financing despite modest available collateral. To address this issue, Allston assisted the Buyer in pursuing an SBA-guaranteed 7(a) loan. Through these efforts, the Buyer obtained the financing necessary to complete the acquisition. The financing structure helped convert a strategically compelling transaction into an executable one.

As a result, the transaction provided the sellers with their desired liquidity and ownership transition. At the same time, employees joined an established, customer-focused organization with significant industry experience. The acquisition also preserved local ownership while positioning the combined business for continued growth throughout the Louisville market.

ABOUT ALLSTON ADVISORY GROUP:

Allston Advisory Group is an experienced mergers and acquisitions advisory firm serving privately held, lower middle market companies. The firm provides mergers and acquisitions, business valuations, and exit strategies. Allston works closely with business owners to understand their objectives and prepare their companies for the transaction process. The firm then manages a disciplined and confidential sale process from initial preparation through closing.

For additional information on this transaction, please contact one of our advisors.

A. ARNOLD WORLD CLASS RELOCATION HAS BEEN ACQUIRED BY THE MANAGEMENT TEAM

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ABOUT THE TRANSACTION:

A. Arnold World Class Relocation (“A. Arnold” or the “Company”) has been acquired by members of the Company’s management team (“Buyers”).

Established in 1905 and headquartered in Louisville, Kentucky, A. Arnold has developed into a leading independent moving and relocation company. The Company serves individuals, families, corporations, and organizations throughout the United States and internationally. Through the A. Arnold Group, the Company provides a broad range of relocation, transportation, logistics, and commercial services. Its integrated capabilities allow customers to coordinate complex moves through an experienced organization.

A. Arnold World Class Relocation specializes in full-service domestic relocation for individual households and multinational corporations. The division manages relocations throughout the United States. Additionally, Sterling International, Inc. provides international relocation services for households and commercial customers. Its capabilities support clients moving employees, operations, and personal belongings across international markets. A. Arnold’s Commercial Services division provides business solutions for companies of various sizes. These services include logistics, transportation, and supply chain management.

MANAGEMENT BUYOUT AND OWNERSHIP TRANSITION:

The transaction transfers ownership to members of A. Arnold’s existing management team. As a result, the Company gains new ownership while maintaining experienced leadership already familiar with its operations. A management buyout may provide several advantages when an established leadership team is prepared to assume ownership. In this case, the transaction creates continuity for customers, employees, and other stakeholders. Moreover, the Buyers already understand the Company’s operations, customers, employees, and competitive position. Their existing knowledge helps reduce disruption during the ownership transition. The transaction also provides the sellers with a path to liquidity while preserving the Company’s established organization. At the same time, management gains the opportunity to participate directly in A. Arnold’s future ownership and growth.

ALLSTON ADVISORY GROUP’S ROLE:

Allston Advisory Group advised both parties in connection with the management buyout. First, Allston analyzed the Company’s financial performance and established a mutually-acceptable transaction value. Next, the firm helped structure a transaction that addressed the objectives of both the sellers and management team. Financing represented a critical component of making the transaction executable. Because the buyers had modest collateral available, conventional acquisition financing presented challenges. Allston therefore assisted management in obtaining financing through an SBA-guaranteed 7(a) loan. In doing so, Allston worked with the parties and financing sources to support the proposed transaction structure. The financing allowed management to complete the acquisition despite the limited collateral available.

The transaction demonstrates how thoughtful structuring may facilitate ownership succession when capable managers lack substantial personal capital or collateral. More broadly, the management buyout provided a practical succession solution for an established company with more than a century of operating history. It also positioned experienced management to lead A. Arnold through its next chapter of ownership.

ABOUT ALLSTON ADVISORY GROUP:

Allston Advisory Group is an independent mergers and acquisition advisory firm serving privately held, lower middle market companies. The firm provides mergers and acquisitions, business valuations, and exit strategies. Allston works closely with business owners to understand their objectives and prepare their companies for the transaction process. The firm then manages a disciplined and confidential sale process from initial preparation through closing.

For additional information on this transaction, please contact one of our advisors.

NEWS SOURCES:

Babson College’s 2013 Middle Market/Small Business M&A Survey

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Babson College recently examined the conditions shaping mergers and acquisitions for small and middle market businesses. Professor Kevin J. Mulvaney directed the research with participation from M&A advisors, bankers, and other transaction professionals. The survey evaluated trends affecting buyers, sellers, financing, valuations, and transaction execution.

The 2013 Middle Market M&A Survey described a market that had improved considerably following the recession. However, economic uncertainty continued to influence transaction activity. For business owners considering a sale, several findings stood out.

First, the survey characterized the environment as a seller’s market for quality companies. Strong businesses could attract buyer interest, but preparation remained essential. The same conditions did not apply equally to underperforming companies. Buyers remained selective and placed greater emphasis on sustainable earnings, growth prospects, and business quality.

Deal execution also required patience. The survey reported that transactions commonly required six to nine months from serious negotiations through closing. Some respondents expected timelines to extend another month or two. Buyer due diligence contributed to these longer timelines. Buyers increasingly used experienced teams to examine financial performance, revenue trends, and future growth potential.

Another finding involved seller participation in smaller transaction. As company size decreased, buyers generally demanded greater seller assistance. That assistance could include earnouts, deferred consideration, employment, consulting, or other continuing involvement. At the time, deferred consideration averaged approximately 20 percent of the purchase price in surveyed transactions.

Financing conditions were also improving. The survey identified greater middle market lending availability and a rebound in SBA-guaranteed acquisition financing. Meanwhile, mezzanine debt yields had declined to approximately 12% – 14%. Historical averages had previously ranged from approximately 15% – 20%.

Taken as a whole, the 2013 Middle Market M&A Survey delivered a straightforward message for business owners. Favorable conditions alone did not guarantee a successful transaction. Quality companies still required careful preparation, realistic expectations, and experienced transaction guidance. Sellers also needed the information and responsiveness necessary to withstand increasingly thorough buyer due diligence.

For owners considering a future capital event, the survey supported planning well before entering the market. Preparation allowed sellers to evaluate alternatives and approach potential buyers from a stronger position.

Using Rules of Thumb as a Business Valuation Starting Point

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Business owners frequently use industry rules of thumb to estimate what their companies might be worth. These formulas offer a quick and convenient reference point. However, business valuation rules of thumb should serve as a starting point rather than a valuation conclusion. Most rules rely on a multiple applied to either revenue or earnings. Earnings measures may include EBITDA, SDE, cash flow, or another industry-specific measure.

Understanding What the Multiple Represents

A rule of thumb reflects observed relationships within a particular industry or market segment. For example, an industry might commonly reference a percentage of annual revenue. Another industry might focus primarily on a multiple of earnings.

At first glance, these formulas appear straightforward. Two companies with identical revenue, however, may have substantially different values. Profitability, growth, customer concentration, management depth, recurring revenue, and competitive position can distinguish one company from another. Company size, geography, capital requirements, and industry conditions may also affect value.

Historical Industry Benchmarks

In the prior year 2010, Business Valuation Resources (BVR) provided revenue-based rules of thumb for several major industry groups. The reported multiples for the period 2008 through 2010 included:

Industry                         2008             2009            2010

Construction                0.39x              0.40x             0.35x

Manufacturing            0.53x               0.61x             0.52x

Transportation            0.69x               0.43x            0.55x

Wholesale Trade         0.46x               0.45x            0.52x

Retail Trade                 0.36x               0.33x            0.34x

Services                         0.56x               0.53x            0.56x

These historical figures illustrate how broad industry benchmarks can change as market conditions change. The variation also reinforces the limitations of relying on a single rule of thumb. Across this period, transaction activity and overall private company valuations were affected by the financial crisis and constrained credit markets. BVR reported fewer private company transactions during 2009 than 2008. Its broader transaction data also showed declining net sales multiples during that period.

However, industry averages cannot account for meaningful differences between individual businesses. Profitability, growth, customer concentration, management depth, and other characteristics may produce substantially different values.

Understand the Transaction Assumptions

Owners must also understand exactly what a particular rule of thumb measures. A multiple does not automatically determine which assets and liabilities transfer to a buyer. Cash, debt, working capital, real estate, and other items depend on the transaction structure. Accordingly, applying a multiple without understanding its underlying assumptions may produce a misleading estimate.

Move Beyond the Rule of Thumb

An experienced valuation professional can analyze the company’s specific financial performance, risks, assets, and market characteristics. An M&A advisor may then evaluate how prospective buyers may view those characteristics during a sale process. Business valuation rules of thumb may provide a useful perspective. However, they cannot replace company-specific analysis or determine what qualified buyers may actually pay.

Rules of thumb provide a reference point. A properly developed valuation provides context, and the marketplace determines the transaction price.

Navigating the Sale and Acquisition of a Distressed Business

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The current economic environment is creating acquisition opportunities involving troubled and financially distressed companies. Declining revenue, excessive debt, restricted credit, and liquidity problems are forcing some owners to consider alternatives. For buyers, distressed business transactions may provide access to assets, customers, employees, technology, products, or geographic markets. However, an attractive purchase price does not necessarily make a distressed company an attractive acquisition.

Understand the Seller’s Situation

A distressed seller rarely has the flexibility available in a traditional sale. Cash requirements may create significant time pressure. Lenders may also influence the company’s decisions and available transaction structures.

Under financial pressure, preserving value becomes increasingly difficult. Employees may leave, customers may become concerned, and suppliers may tighten credit terms. Owners should therefore evaluate alternatives before liquidity problems eliminate viable options. A sale, recapitalization, refinancing, restructuring, or Chapter 11 proceeding may provide different paths forward.

Evaluate More Than the Purchase Price

Buyers should determine why the business became distressed before pursuing an acquisition. Temporary financial problems differ significantly from a fundamentally broken business model. Diligence should examine operating performance, cash requirements, debt, customer relationships, contracts, employees, assets, and potential liabilities.

Beneath the financial distress, a buyer may find valuable operations or assets that fit its existing business. Strategic buyers may identify opportunities to consolidate facilities, eliminate duplicate expenses, or expand into new markets. Financial buyers may see opportunities to recapitalize viable businesses with unsustainable capital structures.

Structure the Transaction Around the Risks

Distressed acquisitions may involve asset purchases, equity purchases, bankruptcy sales, or negotiated transactions with creditors. The appropriate structure depends on the company’s circumstances. Buyers must consider secured debt, liens, working capital, cash requirements, transaction timing, and third-party consents (the bank). Lender cooperation may become essential when secured creditors control significant company assets. Given the compressed timeline, buyers must balance thorough diligence with the risk of losing the opportunity.

Find Opportunities Before They Become Obvious

Distressed opportunities may emerge through competitors, suppliers, lenders, attorneys, accountants, and other professional advisors. Sellers should also seek advice before financial conditions become critical.

An experienced M&A advisor can help evaluate alternatives, identify prospective buyers, and coordinate negotiations with other professionals. Buyers should involve experienced legal, financial, and restructuring advisors early. Distressed business transactions can create compelling opportunities, but financial distress changes the normal transaction process. The strongest outcomes occur when buyers and sellers recognize the problem early enough to preserve viable alternatives.

Pepperdine Private Capital Markets Project

Finding Growth Capital Beyond Traditional Bank Financing

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Many business owners are becoming increasingly optimistic about opportunities to grow their companies. However, access to capital remains a significant obstacle. The Pepperdine Private Capital Markets Project highlights this disconnect. Nearly half of surveyed business owners report insufficient financial resources to execute their growth strategies.

Meanwhile, the continuing effects of the financial crisis have changed the financing environment for privately held companies. Approximately 250 banks have failed since the financial crisis began in 2007. Additional failures and tighter lending standards may further restrict traditional credit. Against these conditions, business owners should understand the broader range of capital available to support growth.

Looking Beyond Traditional Bank Financing

Commercial banks remain an important source of financing for established businesses. However, conventional bank debt may not satisfy every company’s capital requirements. Owners may therefore need to consider alternative growth capital.

Potential sources include asset-based lenders, mezzanine funds, private equity firms, venture capital firms, angel investors, and factoring companies. Family and friends may also provide capital in certain circumstances. Each source presents different costs, risks, and requirements.

Debt financing may preserve ownership but creates repayment obligations. Equity financing may provide greater flexibility but requires owners to share ownership and future value.

Match the Financing to the Growth Strategy

Access to capital alone does not make a financing source appropriate. Owners should first determine why they need capital and how the investment will support growth. A manufacturer purchasing equipment may require a different structure than a company pursuing an acquisition. A rapidly growing company may need additional working capital to support increasing sales.

When evaluating alternatives, owners should consider interest rates, repayment terms, collateral requirements, covenants, and potential ownership dilution. Management should also understand how each financing alternative may affect future flexibility.

Use the Private Capital Markets

The Pepperdine Private Capital Markets Project provides valuable information about the changing private capital environment. The research examines banks, private equity firms, venture capital firms, angel investors, factors, and other capital providers. It also examines financing conditions, investment criteria, and the cost of capital across different market segments. For growing companies, this information may help owners evaluate financing sources beyond their traditional banking relationships.

Prepare Before Seeking Capital

Capital providers need a clear explanation of the opportunity before committing funds. Owners should prepare a business plan explaining the company’s strategy, financial performance, growth opportunities, and capital requirements. Financial projections should demonstrate how management intends to use the capital. They should also show the expected effect on revenue, earnings, and cash flow.

Alternative growth capital can provide additional options during a challenging credit environment. The objective is not simply to find available financing. The right financing should provide sufficient capital while supporting the company’s growth strategy, financial capacity, and long-term ownership objectives.

Allston Advisory Group is an experienced boutique M&A advisory firm providing a variety of services to lower middle market companies. See our footer for contact information.

(502) 742-2933
[email protected]
P.O. Box 21266, Louisville, KY 40221

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