Q3 2022 Market Update - EBITDA MULTIPLES Fall Hard
Growing concerns over inflationary pressures, rising interest rates, and a growing risk of recession resulted in EBITDA multiples falling to 2.9x in the third quarter of 2022, ending the string of increases seen in 2021.
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EBITDA Multiples Continue to Fall Lower
A weakened economic outlook and increased risk of recession brought on by rising interest rates dimmed prospects of continued economic and revenue growth, have clearly affected private business values. The decline in EBITDA multiples started at the beginning of the year and continued to fall over the subsequent three quarters well below the long-term average of 4.3x.
EBITDA Margins increased to 16%
EBITDA, as a percentage of revenue, hit 16% in the second quarter of 2022, where the previous range was
between 11% and 12% from the first quarter of 2019 through the fourth quarter of 2021. The lowest EBITDA
margin point since the fourth quarter of 2016 was 9% in the fourth quarter of 2018.
In an inflationary environment and rising prices it appears companies have improved EBITDA margins, essentially becoming more profitable, this is accomplished by cutting costs or raising prices faster than the cost of key inputs.
While logic seems to imply that a higher EBITDA margin would result in a higher valuation multiple (which held true through 2021), the overall trend since 2016 indicates the opposite effect to be the case.
Selling Price to EBITDA by Sector
All-time EBITDA multiples remain the highest for the information sector (11.1x) and the mining, quarrying, and
oil and gas extraction sector (8.3x).
The information sector is showning a notable increase over its all-time period multiple of 11.1x, the last 12-month EBITDA multiple come in at 13.9x. However this 6.1x lower than the first quarter of 2022 where the average multiple stood at 20.0x for this sector, a very large move.
Meanwhile, the lowest all-time EBITDA multiples are in the accommodation and food services (2.6x) and the other services sectors (3.1x).
The median across all industry sectors for all time periods is 4.3x
10 yr Median Selling Price to EBITDA by Sector (Private Companies)
Median multiples paid for private targets, are organized by industry sector. Multiples across the 15 sectors appear to rise and fall based on various factors. Median EBITDA multiples increased in three sectors from 2020 to 2021. The sectors that had a notable increase were construction and home care and social assistance (an increase of 24% and 17%, respectively). Conversely, 12 sectors faced a decrease. Among those 12 was the real estate and rental and leasing sector, which notably decreased 47%, from 7.7x in 2020 to 4.1x in 2021.
Data source: DealStats Value Index (Q3 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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