The use of “averages” doesn’t always tell the whole story when studying middle market mergers and acquisitions. Case in point, middle-market M&A “average” valuation multiples would have you believe that 2015 ended the year in step with 2014. The average valuation multiple for both years on all transactions, regardless of size, was 6.7x. However, when you drill down into the specific data, a clearer picture is painted.
2015 saw M&A valuations surge in both the lower and upper tiers of the middle market. In the $10-25 million enterprise value range, valuation multiples rose from 5.4x in 2014 to 5.9x in 2015, or an increase of 9.25% year over year. In the upper tier of the middle-market, companies with enterprise values between $100 and $250 million, the rise was even more dramatic; from 7.8x to 9.0x, or an increase of 15.38%. Interestingly, valuation multiples actually dropped nearly 13% for companies in the $50 – $100 million enterprise value range. Acquirers were concentrating on two things last year: building “platforms” in their investment portfolios via larger acquisitions and adding substance to existing portfolios via smaller addon purchases.
Company size and quality still matter in middle-market M&A. Larger, better run companies have continually been rewarded with higher prices at sale. When existing management remains post-close in a large, well-run concern the multiples jump even higher.
In 2015, the use of leverage continued its rise, but its use was not consistent across all middle-market size tiers. The equity percentage contributed by buyers of smaller companies was under 40% and climbed steadily with an increase in the size tier…the larger the deal size, the greater the equity contribution.