Seller’s market sentiment is down in all market segments except for businesses with $5 million to $50 million in enterprise value. Looking back a year, seller’s market sentiment has decreased notably for businesses valued between $1 million and $2 million, dropping six percentage points from Q1 2018 (72%) to Q1 2019 (66%). According to the “Q1 2019 Market Pulse Report,” published by the International Business Brokers Association (“IBBA”), M&A Source, and the Pepperdine Private Capital Market Project, seller’s market sentiment increased for businesses valued from $5 million to $50 million, rising from 77% in Q1 2018 to 81% in Q1 2019. “This is the first time in years that we’ve seen four out of five sectors report a dip in seller market sentiment. This is a sign the market may have peaked and more people are expecting a correction in the year or two ahead,” said Craig Everett, Ph.D., director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. “Sellers should consider selling now or waiting another few years before the market will cycle backup to current conditions. To be clear, this doesn’t mean you won’t be able to sell your business over the next few years, but you probably won’t get the multiples you can get today. Any market pessimism or uncertainty will drive down value across the board.”
When business appraisers evaluate a company, they look at how much others have paid for similar businesses relative to various earnings measures. Selling price divided by earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a commonly used valuation multiple.
Business Valuation Resources recently published EBITDA multiples by industry in its DealStats Value Index (“DVI”). DVI presents an aggregated summary of valuation multiples and profit margins for over 30,000 sold private companies listed in the database. Below are some of the highlights from the report.
Multiples fall in 2019
EBITDA multiples across all industries were highest over a five-year period in the third quarter of 2017, at 4.8x. In the second quarter of 2018, these multiples fell to 3.1x—the lowest levels since the third quarter of 2013. After rising in the third and fourth quarters of 2018, these multiples once again fell to near recent lows (3.2x) in the first quarter of 2019. Nevertheless, the trailing three-month average for multiples has increased over the past three quarters. The relatively smooth trailing three-month average trend line from the third quarter of 2014 through the first half of 2017 gave no clear indication that large fluctuations in multiples paid would ensue in the quarters ahead.
EBITDA margins on the rise
EBITDA, as a percentage of revenue, has trended upwards in the most recent two quarters, tying a five-year high in the first quarter of 2019, at 15%. After reporting at the lowest level (3.1x) in the second quarter of 2018, the selling price-to-EBITDA multiple steadily rose through the fourth quarter of 2018, to 4.6x, before falling near a five-year low, to 3.2x, in the first quarter of 2019. The peaks and valleys of the EBITDA multiple moved opposite to that of the EBITDA margins.
Selling price/EBITDA median is 4.4x
EBITDA multiples are highest for the information sector (11.1x) and the mining, quarrying, and oil and gas extraction sector (8.4x). Meanwhile, the lowest EBITDA multiples are in the accommodation and food services (2.6x) and the other services sectors (3.0x). The median across all industry sectors is 4.4x.