The following is a quote from a gentleman that I have worked with. This came out in his newsletter last week where he analyzed GF Data Resources’ report regarding private equity transactions:
“Now that many more of the “B” and “B+” companies had become a part of the mix, the overall pricing on deals (multiple of EBITDA) fell to the lowest level they’d seen in their 6 year history. In Q3, the average multiple was 5.1 x EBITDA for all of their reported private equity deals. The change in frequency distribution of “A” vs. “B” companies was dragging down the average, with more of the “B” class in the third quarter deals.”
A “B” company is a company with strong financials and is experiencing steady growth but not strong growth. Companies working in the construction/housing sector will see their multiples at the low end. If the buyer is using leveraged debt, the current multiple is ranging from 1.7 to 3.8 for these “B” companies.
These multiples are similar to multiples after the 2000 financial crisis. It took six years to get the high multiples that we were seeing over the last couple years.
So the bottom line? Pick a multiple for your forecast that is realistic yet still optimistic. What does an investor want to see? Optimism or Realism?