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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.

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.

Tag Archive for: MiddleMarket

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

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

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