by Scott Bushkie, CBI, M&AMI
I just got back from an M&A conference in Austin, Texas, where we discussed trends and best practices around mergers and acquisitions. Among the takeaways for the week: Several private equity firms went on record and admitted that they’re paying more for businesses today.
We know multiples are up, but this is the first time I’ve ever heard any private equity representative admit to price increases in a public setting. These are professional buyers who are always very disciplined and careful about setting expectations—especially in a room full of advisors like me, the people whose job it is to drive prices higher.
We had private equity reps sitting on different panels throughout the week, and several agreed that they were paying higher multiples than they have for several years.
Getting them to go on record like that, at an industry conference, is a big deal. And later, in private discussions, I heard more of the same. I talked with 30 or 40 private equity firms, and many of them expressed their frustration over getting outbid on deals in the last several months.
This is great news for sellers, of course. The market realities are such that there’s no point for the private equity firms to hedge about prices. That said, “strong multiples” does not mean “rising multiples,” and at least one industry indicator suggests the market may have hit a plateau.
In the Q3 Market Pulse Report, issued by IBBA, M&A Source and the Pepperdine Private Capital Markets Project, advisors indicated that multiples had leveled off, or even decreased slightly, in the last quarter.
That means that for sellers who are waiting to time the market, now might be the time to take action. We can never know how high multiples will go or when they’ll fall. But it’s possible we’ve reached the peak for this M&A cycle.
For the small business M&A (Main Street and lower middle market), companies in the lower middle market will fare best, as demand still outweighs supply in this sector. Right now, businesses with EBITDA of at least $1 million to $2 million (typically businesses with revenues of $10 million or greater) will likely draw the highest multiples.
For example, we’re representing a company in the North Dakota oil and gas market with revenues of $20 million and EBITDA of $4 million. We’re getting an immediate response from our initial marketing efforts, with several private equity firms and at least one strategic company indicating they’ll submit written Indications of Interest (IOI’s).
I’m confident we’ll be able to present our seller with several buyers to choose from, creating an auction-like environment for the sale. And if all goes as expected, there will be at least a few more buyers grumbling about getting outbid in 2015.
Scott Bushkie is Principal of Cornerstone Business Services, an M&A Advisory firm. To request a book with advice on the exit planning process, or to discuss other confidential options, contact Scott at (920) 436.9890 or [email protected].