Overview

The merger and acquisition (M&A) environment was changed in 2021, perhaps permanently. Following the COVID-19 pandemic in 2020, in which the U.S. private equity (PE) deal count increased 1% despite draconian forecasts, the deal count increased 55% in 2021.1

As we noted in our “Q3 2024 Middle-Market M&A Insights,” there were record-setting activities from Q4 2020 through Q2 2022.

A confluence of factors led to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples rising in 2021. Per PitchBook, all U.S. PE transactions saw an increase in EBITDA multiples from an average of 10.4 from 2014 to 2020 to 13.7 in 2021.2 Increasing multiples leads to increased risk for the buyer, which has led to increased scrutiny during the due diligence period. This article examines the nuances of factors impacting EBITDA and EBITDA multiples and explains the importance of preparation before a transaction.

The Importance of Due Diligence

The more expensive an asset is, the more cautious a potential buyer may be when considering the purchase of that asset. Similar to how buyers react when considering a car or a home purchase, sellers inherently face more scrutiny when deal valuations increase. Potential buyers have return on investment (ROI) expectations, and increased multiples present a unique challenge to managing the achievement of those ROI requirements.

Sellers may worry that increased diligence could lead to extended timelines to close, which is not in the sellers’ best interest. As a result, sellers often prepare ahead of time to have multiple potential buyers analyzing their company simultaneously. This strategy puts the pressure back on the buyers, requiring them to submit more definitive terms to get deal exclusivity. But this also requires sellers to field questions from various parties simultaneously.

The Impact of Multiples

While multiples can and will be negotiated, market forces tend to determine an acceptable range of multiples for a given transaction based upon many factors, including industry, company size, margin and growth profile, quality of the management team, and more. Many buyers and sellers have access to industry publications, such as the PitchBook statistics referenced earlier.

Read the full article here.