Q3 2021 Market Update - EBITDA MULTIPLES TREND LOWER THROUGH 2021
The cyclical spread and longevity of the coronavirus have had, somewhat surprisingly, a more significant impact on EBITDA multiples than the initial fear at the onset of the pandemic. Further examination of EBITDA over the past 18 months, or past six quarters since the start of the pandemic, show that common factors such as risk, growth, and time period (among others) have created a wave-like pattern. This pattern highlights the highs and lows associated with the deal environment.
In the second quarter of 2020 or the initial period when the risks associated with the pandemic were highly uncertain, EBITDA multiples were at their lowest levels in 2020, at 3.8x. By the third and fourth quarters of 2020, when the pandemic seemed more manageable, thus enabling the U.S. economy to reopen for business, the expected growth spurred EBITDA multiples to their highest level in 2020, to 4.3x and 4.2x.
EBITDA Multiples Trend Lower in 2021
As the Delta variant emerged and the pandemic lengthened, returning us again to an environment of risk and uncertainty, EBITDA multiples plummeted to their lowest levels over the illustrated period, to 3.1x and 3.2x.
EBITDA Margins rise to14% - highest since 2017
EBITDA, as a percentage of net sales, rose to 14% in the first and second quarters of 2021, moving up 2.0 percentage points from its rate of 12% in the fourth quarter of 2020. At the onset of the coronavirus pandemic in the first quarter of 2020, EBITDA margins remained at 11% through the third quarter of 2020. The rise in EBITDA margins during the most recent six-quarter period encompassing the duration of the coronavirus indicates that businesses across the country have adapted to the operating environment the pandemic created, that of decreasing capital expenditures, restrictive budgetary policies as well as a decrease in employment expenses as a result of the challenges in finding qualified employees to hire. While the logic seems to imply that the higher EBITDA margin would result in a higher valuation multiple, the trend since 2016 indicates the opposite effect is the case.
Selling Price to EBITDA by Sector
The EBITDA multiple for three of the 18 sectors increased through the second quarter of 2021 as the utilities sector moved higher, the finance and insurance sector moved up and the educational services sector rose. Conversely, the EBITDA multiple declined in two of the 18 sectors, with the manufacturing sector moving down from and the information sector declining. EBITDA multiples remain the highest for asset-heavy sectors like the information sector, 11.2x, and the mining, quarrying, and oil and gas extraction sector, 8.5x, and are the lowest in the accommodation and food services, 2.6x, and the other services sector, 3.1x.
Over the past 12 months, the median EBITDA multiple in the utilities sector was significantly higher than the historical median, 19.3x compared to 7.1x. The rise comes as a resurgence in the number of acquisitions of microcap software and computer-related technologies companies, which have done a good job of adapting and evolving in 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, which, due to the coronavirus, parents shifted in favor of distance learning, at least as an alternative to in-person education.
10 yr Median Selling Price to EBITDA by Sector (Private Companies)
Median EBITDA multiples have increased in three of the 15 sectors and decreased in nine of the 15 through the first half of 2021. The median for all sectors fell to its lowest multiple since 2013, to 3.1x, a significant decline from the 2019 and 2020 multiple, which was 4.2x and had been a 10-year high.
Data source: DealStats Value Index (Q3 2021) - 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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