Capstone Partners has released its 2023 Middle Market M&A Valuations Index which shows that while equity markets largely shrugged off the rapid succession of interest rate hikes in 2023, middle market merger and acquisition valuations experienced downward pressure.
According to Capstone, elevated transaction costs, uncertainty over projected cash flows, and a reserved private equity buyer pool contributed to average M&A valuations falling to 9.6x EV/EBITDA in 2023, compared to 9.9x in 2022. Several transactions at premium valuations helped to bolster this average, while the median EBITDA multiple fell more drastically to 8.0x EV/EBITDA compared to 8.5x in the prior year.
While business owners encountered a challenging valuation environment, several bright spots of the market have provided optimism for resilience and recovery in transaction value in 2024. Notably, average three-year EBITDA purchase multiples in the business services, fintech and services, industrial technology, transportation, logistics and supply chain, and technology, media and telecom sectors improved on a year-over-year basis.
Many dealmakers are optimistic that 2023 marked a trough for both middle market M&A volume and pricing, with 2024 positioned to experience a rebound in purchase multiples.
Buyers demonstrated heightened discipline in middle market M&A processes in 2023, refraining from overextending themselves to acquire target companies. While high-quality assets still commanded solid buyer interest and competition in bidding, market clearing bids were less frequent than in prior years.
In 2023, 31% of transactions closed at 10x EBITDA or higher—a decline from 38% in 2022 and 43% in 2021. This may have coincided with buyers moving to lower levels of the middle market, a common occurrence amid market uncertainty. The average enterprise value of sold target companies amounted to $89.4 million, a substantial drop from $139.3 million in 2022. When buyers did pay premium multiples, typically these businesses had demonstrated gross margin defensibility, healthy revenue visibility, and sustained product or service demand.
Capstone further reports that many dealmakers are optimistic that 2023 marked a trough for both middle market M&A volume and pricing, with 2024 positioned to experience a rebound in purchase multiples.
Private equity buyers, facing limited partner pressure to generate returns, are expected to reenter the M&A markets in 2024.
Seller and buyer expectations are anticipated to become more aligned after such dislocation post-pandemic, when purchase multiples at times became detached from fundamentals. For the first time in nearly a decade, the cost of money is meaningful, and likely will be for the near future as the Federal Reserve works to meet its mandate. However, quality companies with sound financials and resilient end markets are poised to garner buyer appetite.
Private equity buyers, facing limited partner pressure to generate returns, are expected to reenter the M&A markets in 2024 after sitting on the sidelines for much of 2023. The valuation environment may take some time to recover, but the M&A and macroeconomic environment in 2024 is expected to present a favorable backdrop for many prospective sellers to achieve an optimal exit.
Capstone’s investment banking services include M&A advisory, debt and equity placement, corporate restructuring, special situations, valuation and fairness opinions and financial advisory services. The Boston-headquartered firm was acquired by Huntington Bancshares in June 2022 and has more than 175 employees.
To download a copy of Capstone’s Middle Market M&A Valuations Index click HERE.
© 2024 Private Equity Professional | March 26, 2024
