Depressed Middle Market Multiples

Based on recent numbers it seems Main Street is stomping the Middle Market M&A companies in terms of multiple weight. A number of reports have come to light of late that showcase some of the divergence between the size of the deal and the multiple involved. For instance, Pratt’s Stats came out with a report that included three separate enterprise values, the multiples used in the deals and historical data as well. Pratt’s stats included private buyers only. Another report from GF Data Resources indicated some interesting numbers for  the true lower middle market ($10 million to $250 million) all based on private equity deals:

Quarter Transactions EBITDA*
Q1 2008 23 5.6
Q2 2008 34 5.6
Q3 2008 35 6.2
Q4 2008 31 5.9
Q1 2009 15 6.2
Q2 2009 16 6.5
Q3 2009 20 5.1
Q4 2009 20 5.4
Q1 2010 17 5.2
Q2 2010 30 5.5
Q3 2010 42 6.1
Q4 2010 58 6.1

This may be a story of the big get bigger and the small get, well, they get what’s left over. However, our numbers may be a bit skewed given the fact that many strategic public buyers were excluded from the data.

But, we should also pay attention to what is going on in the numbers. First, the overall number of deals that occurred dropped during the recession. This is, of course, no surprise. During the first half of 2009, the better your company was, the higher the multiple you were able to glean, otherwise, you would have probably been dead in the water. It is not too far flung to recognize that business buyerswill run to quality over quantity when things get bad. Late 2010 data indicate a potential recovery. Now, let’s take a look at the median multiples for companies under $1 million in enterprise value.

Multiple EBIT**
Multiple EBITDA
2003 0.48 3.52 3.80
2004 0.50 3.45 3.80
2005 0.48 3.27 4.05
2006 0.50 3.53 4.16
2007 0.49 3.11 3.73
2008 0.48 2.35 2.60
2009 0.45 2.32 2.31
2010 0.45 2.13 2.10
Median Multiples for Companies with Enterprise Value Between $1 Million and $5 Million

Year Revenue
Multiple EBIT**
Multiple EBITDA
2003 0.40 7.13 7.16
2004 0.43 5.57 5.49
2005 0.42 5.38 5.72
2006 0.41 5.42 5.53
2007 0.45 5.16 5.41
2008 0.40 4.58 4.29
2009 0.41 4.08 4.18
2010 0.40 3.39 3.31
**EBIT = Earnings Before interest and Income Tax

These numbers indicate no real sign of the recovery of pre-recession multiple values. Take a look for instance, at the numbers: decreases in multiples of almost 50% since pre-recession levels. This is a bit discouraging for those who may be looking to retire with some type of liquidity event. However, the Main Street firms are making out like bandits. If your company really has a great reason to believe, now may be the time, otherwise, holding out could be a good idea. That is an honest opinion, even though many in the industry make their livings off the kill from deal flow.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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