Alteris periodically reports on valuation metrics for companies in the lower middle market.
When the owner of a privately held business decides to sell their company, they will want to know what they can expect to receive.
This is not entirely a straightforward process, as each company and buyer are unique.
There will be circumstances and factors specific to a certain company and its buyer that will raise or decrease the value of an individual business.
Further, the state of the M&A market in general and for certain types of companies specifically will either increase or decrease the value of an individual business.
So while we may be able to report averages, any specific company will almost certainly vary from the average. That is why it is a very good idea to bring in a professional business valuator to assist in knowing what your company is worth.
But sometimes it is interesting to get a broad “ballpark” of valuation metrics at a point in time. The Pepperdine Private Capital Markets analyzed data from its 2018 Q3 Market Pulse survey. This survey consists of information provided by business intermediaries, M&A advisors, and other business transaction professionals based on their recent deal experiences.
Here is the averages of their information:
For companies valued in the $5MM- $50MM deal range, the median EBITDA multiple paid was 5.4 and the median SDE multiple paid was 3.8.
For the $2MM- $5MM deal range, the median EBITDA multiple paid was 4.0 and the median SDE multiple paid was 3.0.
For the $1MM- $2MM deal range, the median EBITDA multiple paid was 3.9 and the median SDE multiple paid was 3.3.
For the $500K- $1MM deal range, the median EBITDA multiple paid was 3.1 and the median SDE multiple paid was 2.8.
For companies that sold less than $500K, the median EBITDA multiple paid was 1.9 and the median SDE multiple paid was 2.0.
As expected, the trend is that the larger the deal size, the larger the multiple. This is probably due to the fact that larger companies are perceived as less risky for the buyer. The buyer would be more willing to pay more for a business that has lower risk, resulting in a higher chance of a favorable ROI.
Many first time sellers come in to the process with a pre-determined amount that they believe they will receive for their business. This amount is often higher than what can be obtained on the market. This is understandable as their business is worth more to them than just money.
But as I said above, given the many factors that go into determining the amount a buyer is willing to pay, a professional valuation is the best way to get an idea of what to expect when you go to market.
Some Definitions:
SDE = Seller’s Discretionary Earnings, a surrogate of cash flow that takes the owner’s salary/income into account. This measure of cash flow is most often used in valuing privately held businesses.
EBITDA = Earnings Before Interest, Taxes and Depreciation, a surrogate description of cash flow.
ROI = Return on Investment
