Companies that have demonstrated high performance are likely to command higher EBITDA multiples in 2012 as consumer confidence grows and relatively few sellers remain on the market, mergers and acquisitions experts say.
“Multiples are a measurement of risk and if people perceive less risk with a particular acquisition, it's going to get a higher multiple,” said Ed Krajcir, president of Sunbelt in Brookfield.
He expects to see a steady pick-up in sellers in 2012, but doesn't anticipate a large influx of seller activity until 2013.
“What could drive multiples down is just a flood of businesses in 2013, 2014 going to market,” Krajcir said.
But in the near term, for a company with growth potential, the large number of interested buyers could drive the multiple up, he said.
“There continue to be more buyers than sellers in the market,” said Ron Miller, managing director at Cleary Gull Inc. in Milwaukee. “Private equity funds have a significant amount of unspent, uninvested capital and corporations have record cash balances.”
That's putting upward pressure on prices. And while leverage still has some recovering to do, multiples are soaring, he said.
“Although availability of debt is not back to record levels, purchase prices are approaching historic highs, pre-recession levels,” Miller said. “Both regulatory and economic concerns are dampening banks' willingness to leverage multiples back to historic levels.”
Stability of cash flow and growth opportunities will command the highest multiples across all industries, he said.
John Beagle, managing director of Grace Matthews in Milwaukee, said uncertainty about the macro economy and the expiration of the capital gains tax break at the end of 2012 are driving more sellers to market this year.
And a strong debt-to-cash position for most companies on the buyer side means those sellers will get a lot of attention, he said.
“For quality companies, the multiples keep going up,” he said. “2011 was a pretty high year for multiples and I think 2012 will just kind of continue that trend.”
Strategic buyers will likely pay higher multiples for acquisitions with which they can realize synergies and private equity groups usually are willing to pay a higher multiple when there's heightened demand for a business because they have to invest funds in quality companies, Beagle said.
Buyers remain fairly aggressive, but disciplined, said Corey Vanderpoel, director of mergers and acquisitions at Baker Tilly Capital LLC in Milwaukee.
“The corporations have strong balance sheets and they're in a market where organic growth can be challenging to come by,” he said. “Private equity groups have very large raised funds and a limited number of very strategic, strong opportunities.”
Medical device and technology companies with strong top and bottom lines are likely to have the highest multiples right now, sometimes at a 30 percent premium, Vanderpoel said
“The marketing process that you run can (also) oftentimes drive the multiple,” he said.
Many business owners who made it through the recession are still cautious, but are starting to think about selling their companies in the next couple of years, said Todd Manderfield, executive vice president of Pentvia Partners LLC in Milwaukee.
“Now that they've got some solid history behind them from a financial standpoint, they're getting back on their feet,” he said. “Everybody is coming back to the table and is more interested in getting deals done.”
But while EBITDAs (earnings before interest, tax, depreciation and amortization) have fluctuated in the $2 million to $20 million price range, Manderfield said he has not seen the multiples move around much.
“Were not in the two to three (multiple) range, but we're certainly not up in the seven to eight times, either,” he said.