Recent Decline in Transaction Multiples
By Charles A. Miller, CBA
Sales price valuation multiples for small- to middle-market privately held companies have historically been fairly steady over time in many industries. However, the public capital markets experienced significant declines in 2008 and 2009 at the forefront of the recent recession; and the recession negatively impacted sales price multiples for privately held companies as well. The decline is illustrated in the following graphs reproduced from “Historic Trends in Private Company Multiples” (BVR, Business Valuation Resources, LLC, May 2010). These charts illustrate that sales price multiples declined roughly 20% or more by 2009 from the central tendencies shown 2001 to 2007.
The first chart was created using data from Pratt’s Stats® and the second was created using data from BIZCOMPS®. Both databases (available at BVMarketData.com) contain details of sold private businesses, including selling price, industry, financial information, valuation multiples and more. The Pratt’s Stats® database has financial details available for more than 16,470 private companies including both larger M&A transactions and main street businesses while the BIZCOMPS® database typically contains transactional information on smaller “Main Street” businesses (service station, restaurant, convenience store, print shop, travel agent, florist, coin laundry, beauty salon, auto repair shop, video rental, day care center, etc.).
Note: in the above chart, MVIC is an abbreviation for Market Value of Invested Capital. MVIC includes both the market value of equity and the interest bearing debt.
Note: in the above chart, SDE is an abbreviation for Seller’s Discretionary Earnings. Seller’s discretionary earnings is defined as the company’s net profit before taxes and any compensation to the owner (normally one working owner) plus amortization, depreciation, interest, other non-cash expense and non-business related expenses.
Recently, there have been positive signs that the mergers and acquisition market is improving, which may eventually translate into improved multiples. According to a recent article in the StarTribune (Neal St. Anthony et al, “Flurry of Deals Signals Recovery.” StarTribune, January 31, 2011), Minnesota investment firms closed 298 mergers and acquisitions in 2010 compared to 152 the previous year. Much of the improvement was attributed to an increase in activity in December 2010. Nationally, there were 9,833 deals in 2010 compared to 7,350 in 2009, and 8,734 in 2008.
It remains to be seen if, or how much, transaction multiples will improve in 2011 with the recent stabilization of the economy. However, business valuations performed with effective dates in late 2008 to 2010 should address the existing recessionary economic environment, especially when transactions from previous years are used for comparison purposes.