What is the Current Valuation Multiple?
This is a question that is often posed to business valuators. The answer is that multiples are dependent upon numerous factors that may or may not exist in any given business, as at the valuation date. As such, this question cannot be properly answered without the services of an experienced professional to assess the factors impacting the multiple that would be appropriate to a specific business.
While the application of a multiple to a specific business requires careful consideration of the unique factors of that business, it is useful to consider trends in transaction multiples in order to confirm the overall impact of factors that are not specific to a particular business or industry, most notably the economy.
Some of the most significant events impacting the economy in recent years include the following:
In 2008 the Canadian, North American and global economies were hit with the worst recession since the 1930s. While the impact of the recession was strong, the Canadian economy fared better than many of the world’s economies.
In order to stimulate the economy the Canadian government engaged in significant stimulus spending, resulting in deficits and increasing debt levels. Additionally, the Bank of Canada & U.S. Federal Reserve have maintained historically low interest rates since the recession as part of their ongoing efforts to stimulate spending and hasten the economic recovery.
Since 2009 the European sovereign debt crisis, most notably Greece, has impacted the world’s economies.
The impact of austerity measures, implemented in several countries, has continued to have an impact on global economic recovery.
In 2012, these issues continue to impact the economy. Additionally, the deficits/debt levels of the Canadian and US governments and anticipated deficit cutting measures are negatively impacting economic growth.
To assess the historic impact of these factors on valuation multiples, we considered the relationship of Market Value of Invested Capital (MVIC) to Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) for private companies. MVIC is the total consideration paid including any interest bearing liabilities assumed by the buyer. We have summarized the median multiple of EBITDA for U.S. private companies sold during the period 2003 to 2012, as published by Pratt’s Stats, as follows:
As illustrated in the graph, the median multiple of EBITDA for private buyers of U.S. private companies during the period 2003 to 2007 ranged from 4.24 to 4.63. However, in 2008 this multiple declined significantly to 3.1, reflecting the impact of the recession. This multiple continued to decline in 2009 and 2010, due to the factors described earlier. In 2011 and 2012, the multiples have shown signs of stabilizing.
The median multiple of EBITDA increases when both private and public buyers are considered. Pratt’s Stats comments that “in general, public buyers paid higher multiples for private targets than private buyers paid. This may partially reflect synergies between the public buyer and the private target. Also, the typical acquisition public buyers made was larger than those made by private buyers, so the possibility exists that larger companies may sell for higher multiples than smaller companies.” The graph also illustrates that the difference between multiples which include and exclude public buyers has decreased since 2008. This suggests that the impact of public buyers on the overall multiple for private companies was less significant following the 2008 recession.
Business size can also have a significant impact on the implicit multiple paid in a transaction. The following graph summarizes median valuation multiples by company size as indicated for alternative revenue ranges:
As illustrated in the graph, the median multiple of EBITDA for companies with revenue ranging from $0 to $1,000,000 was relatively consistent with the overall multiples described earlier. The multiples for these companies decreased significantly with the 2008 recession and have remained at this lower level.
The multiple for companies with revenue ranging from $1,000,000 to $5,000,000 generally followed this same pattern, though they experienced a more gradual decline in the post 2007 period.
The multiple for companies with revenue in excess of $5,000,000 have experienced much more volatility than those of smaller companies but they too have settled in at a lower level post 2007 than earlier.
Although the size based delineation appears stronger for companies above or below the $1,000,000 threshold than the $5,000,000 threshold, the data does provide support for the comment by Pratt’s Stats “that larger companies may sell for higher multiples than smaller companies.”
The world’s economies continue to struggle with issues such as the European recession and the impact of many government’s austerity measures. The Canadian economy is expected to experience modest growth in real GDP in 2013 and 2014 of 2.4% and 2.8%, respectively. The US economy is expected to grow at 2.3% and 3.1%, respectively. The ongoing North American and global economic issues, coupled with such modest growth forecasts imply that the stabilization of multiples observed in the last few years may continue.
The content of this article is intended for educational purposes only and should not be relied upon as a substitute for specialized advice in connection with any particular matter. Although the material has been carefully prepared, the writer and Firm do not accept any legal responsibility for its contents and for any consequences arising from its use.
EBITDA multiples for transactions involving both private & public buyers were obtained from a Pratt’s Stats publication entitled “Pratt’s Stats Median Valuation Multiples – All Industries 1998 – 2011″ and from Pratt’s Stats transactional database. EBITDA multiples for transactions involving only private buyers were obtained from a Pratt’s Stats publication entitled “Pratt’s Stats Private Deal Update – 4Q 2012″.
Economic data was obtained from a RBC Economics publication entitled “Economic and Financial Market Outlook December 2012.”
Rob Smith, C.A., C.B.V.
Manager, DJB Financial Services