Free Money Not So Free?

I would attribute it more to interest rates than anything else. That discounted cash flow of future cash is now more valuable. The terminal value is much higher. etc. As such the present value of the business and thus multiple is up.

Another aligned factor is that investors basically no longer have a risk free return option, so the required IRR is much lower than in the past. Firms can raise lots more money with expectation for lower returns. When you can raise money with out needing large IRR hurdles, you can pay more for the same business and still have attractive returns for investors. Thus, more money is chasing the same deals and that is driving multiples higher.

This may seem less important in a small acquisition, but is a big deal in larger ones. As those multiples start to creep up over the last few years, the middle and lower market have adjusted slowly because those businesses become more attractive as acquisition targets to companies that have higher multiples. Pay 5x for earnings that are viewed as worth 10x+ by your investors and there can be a lot of value created gobbling up these smaller companies.

Just my eyeball of the market but multiples that were 3-3.5x now seem to be in the 5+ range and seem to still be increasing.

I feel how Sam feels — anecdotally, seems like multiples have creeped up in the last few years. I think it’s only partly due to the recent fiscal policies (e.g. getting SBA to pay 6 months of your loan payments certainly doesn’t hurt), I also think a big reason is the growing prevalence of EtA in general, thanks in part to top B-schools all pushing curricula and resources to advance EtA, and great platforms like this one that help make the information accessible. Even pandemic aside, there’s a lot of macro tailwinds behind more and more millennials (and Gen-Xers) considering EtA. Again, super anecdotal, but when I first started looking at potential small businesses to acquire just 2-3 years ago, I rarely ever “competed” with another searcher. Nowadays, it happens a lot more often. Even for non-brokered deals, I often run into a seller who’s says something like “I also talked another guy a few months ago who’s also doing what you’re doing...”. (If it’s a brokered deal, I always ask the broker at some point before the LOI “so what kind of other buyers is the owner talking to/considering?”, and the brokers usually tells me the general high-level.)

For brokered deals, I also seem to see more “sophisticated” processes recently that are starting to resemble IB-run MM processes, whereas 2-3 years ago, most of these processes seemed to be simpler (more akin to real estate brokering processes).

Again, just one person’s anecdotal two cents. Would love to hear others’ experiences.