Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Update on transaction multiples

multiples, transaction multiples, valuation, businessYou have probably heard valuation multiples being tossed around by owners and others regarding the value of businesses. The typical multiple referenced is a multiple of EBITDA which is defined as “Earnings Before Interest, Taxes, Depreciation and Amortization.” Owners sometimes overestimate the value of their business. Recent market data can be very instructive but must be evaluated on a case-by-case basis.

One of the larger business sale transaction databases, DealStats, published by Business Valuation Resources, LLC (BVR), contains data on a large number of private company business sale transactions and multiples across many industries. According to DealStats Value Index 1Q 2019, the median EBITDA multiple for all private company business sale transactions reported in DealStats ranged from a low of approximately 3.1 (Q3 2013 and Q2 2018) to a high of 4.7 (Q3 2017). The overall median multiple reported in the fourth quarter of 2018 was 4.1 (Q4 2018). Median EBITDA multiples by industry vary from 2.6 (Accommodation and Food Service) to 11.1 (Information), with a median across all industry sectors of 4.4.

Size Matters

Median EBITDA multiples for transactions up to $1M have been fairly steady at just below 3.0 since 2015 and, for those between $1M and $5M, the multiple has been fairly steady at approximately 4.0 to 4.5 since 2015. The multiple for transactions greater than $10M increased to 12.0 in 2017 and 2018. For some reason EBITDA multiples on transaction sizes between $5M-$10M have declined. In 2018, the median EBITDA multiple for this transaction size was reported at 3.3, a decline from approximately 7.0 in 2014.

Public company buyers of private company sellers generally pay higher EBITDA multiples compared to private company buyers of private company sellers across all industry sectors. This may be due to synergistic impacts between the public buyer and private seller, the larger typical private seller to public buyers compared to private buyers and consolidation within industries.

Summary

Value changes over time and some industries are more volatile than others. The data on multiples in the DealStats Value Index is consistent with prior published data we have studied reflecting higher median multiples for companies with higher levels of EBITDA. Both the size of the selling company and the type of buyer can also significantly impact the multiple. If you are considering the sale of your business or assisting your client in such a matter, it may be appropriate to obtain an appraisal from a qualified business appraiser.

Stephen E. Koons, CPA, ABV, ASA, CFF

Source: DealStats Value Index 1Q 2019, published by Business Valuation Resources, LLC (BVR).