The market story of privately owned companies is somewhat mixed in 2018, while earnings before interest depreciation and amortization (EBITDA) margins have declined, the multiples paid for those earnings have increased while at the same time the number of acquisitions have declined. Do note, these are averages that incorporate all industries and market sectors.
EBITDA multiples rise
We have seen a great deal of quarterly volatility in multiples over the past three years. EBITDA multiples across all industries were highest over a six-year period in the third quarter of 2017, at 5.0x. By the second quarter of 2018, these multiples fell to 3.5x—the lowest levels since the fourth quarter of 2013—but increased to 4.5x and 4.2x in the third and fourth quarter of 2018.
In addition, the trailing three month average for multiples has increased in the third and fourth quarters after trending downward in the two quarters prior. From the third quarter of 2014 to the third quarter of 2016, the relatively smooth trailing three-month average trend line gave no clear indication that large fluctuations in multiples paid would ensue in the quarters ahead.
Margins are declining
EBITDA as a percentage of revenue, which had peaked in the first half of 2018, subsequently declined in the two quarters following. After reporting at the lowest level (3.1x) in the second quarter of 2018, the selling price-to-EBITDA multiple rebounded in the third quarter, to 4.3x, before settling at 4.1x in the fourth quarter of 2018.
Selling Price to EBITDA by sector
EBITDA multiples are highest for the information sector (11.1x) and the mining, quarrying, and oil and gas extraction sector (8.5x). 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.
Acquisitions slow in 12 of 15 industry sectors
The pace of private-company acquisitions slowed in 12 of the 15 industry sectors from 2017 to 2018. The number of acquisitions in the information sector had the biggest decline, 65.2%, while acquisitions in the educational services sector saw the largest increase, 63.2%.
Data source: DealStats Value Index (Q1 2019) - The DealStats Value Index summarizes valuation multiples and profit margins for private companies that were sold over the past several quarters. Business Valuation Resources (BVR) captures this private company transaction data in its DealStats platform.
Malahat Valuation Group is a multi-discipline business valuation and equipment appraisal company that specializes in providing valuation services to owners of privately owned companies. Business owners need to know the true value of their businesses and assets to make critical decisions that are based on facts not speculation (or averages). We answer the age old question of "what is it worth"?
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