Q1 2022 Market Update - EBITDA MULTIPLES FALL Lower
Growing concerns over rising inflationary pressures coupled with the spread of the omicron variant weakened the outlook of continued economic growth, resulting in EBITDA multiples falling to 3.9x in the fourth quarter of 2021, ending the string of increases seen in the prior two quarters.
This is the lowest multiple since the start of the pandemic in the second quarter of 2020. The steep decline came following a string of two quarters with the multiple increasing.
EBITDA Multiples Fall Lower from 2021
While a weakened economic outlook dimmed prospects of continued economic growth, the decline in the fourth quarter continued the cyclical trend of a decline in the EBITDA multiple in the fourth quarters, dating back to 2017. Prior to its decline, the EBITDA multiple rose to 5.0x in the third quarter of 2021, the highest multiple since the start of the pandemic and the fourth quarter of 2018.
EBITDA Margins remain at 12% - from the prior quarter
EBITDA, as a percentage of net sales, remained at 12% in the fourth quarter of 2021, a decline from the 13% margin seen in the first two quarters of 2021. From the first quarter of 2019 through all of 2020, EBITDA multiples saw little movement, changing from 11% to 12%.
In what can be deemed as a lesson learned as a result of the pandemic, it appears as though companies have improved operating costs by decreasing capital expenditures and operating under more restrictive budgetary policies, in addition to a decrease in employment expenses, government wage subsidies, as well as lower interest payments on loans as a result of low-interest rates on borrowing, which resulted in EBITDA margins rising to 13% through the first half of 2021. Notably, while logic seems to imply that a higher EBITDA margin would result in a higher valuation multiple, the trend since 2016 indicates the opposite effect to be the case.
Selling Price to EBITDA by Sector
All time periods - The EBITDA multiple for two of the 18 sectors increased through the fourth quarter of 2021 as the wholesale trade sector moved higher, from 5.5x to 5.6x, and the information sector rose from 11.2x to 11.3x. The EBITDA multiple for the administration and support and waste management and remediation sectors and the mining, quarrying, and oil and gas extraction sectors declined from fourth-quarter results, moving down from 3.7x to 3.6x and 8.5x to 8.3x, respectively. EBITDA multiples remain the highest for asset reliance businesses, or, specifically, the information sector, 11.3x, and the mining, quarrying, and oil and gas extraction sector, 8.3x, and are the lowest in the service sector of the economy, or, specifically, in the accommodation and food services, 2.6x, and the other services sectors, 3.1x. The median across all industry sectors over the past seven quarters, or the period covering the onset of the coronavirus, is lower than the historical median, 3.9x versus 4.4x.
Last 12 Months - The median EBITDA multiple in the information sector was significantly higher than the historical median, at 20.0x compared to 11.3x. The rise comes as a resurgence in the number of acquisitions of microcap software and computer-related technologies companies, where, post-COVID-19 lockdowns, the technology companies have done a good job of adapting, evolving, and shifting more of their employee workload to remote work while maintaining efficiency. As a result, buyers are showing their confidence in these companies emerging following the pandemic.
This trend is also apparent within the educational services sector, when, due to the coronavirus, the trend shifted toward distance learning, at least as an alternative. Over the past 12 months, the median EBITDA multiple, at 13.4x, was significantly higher than the historical median, at 3.8x. The EBITDA multiple for the manufacturing sector, which has been hit hard by supply-chain and employment-related issues, have been significantly lower over the past 12 months than the historical median, 4.5x versus 6.4x.
10 yr Median Selling Price to EBITDA by Sector (Private Companies)
Data source: DealStats Value Index (Q1 2022) - 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.
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