FREE MONEY NOT SO FREE?
All, did multiples of purchased small businesses move up in the last year as a result of all the money printing the Fed did? I haven't noticed too much difference but wanted to get a sense of what others are seeing or know.
All, did multiples of purchased small businesses move up in the last year as a result of all the money printing the Fed did? I haven't noticed too much difference but wanted to get a sense of what others are seeing or know.
Also, a company with larger SDE (Seller's Discretionary Earnings) as a percentage of revenues tends to sell at a lower multiple than a company with smaller SDE as a percentage of revenue. The reason that SDE tends to go down as company revenues increase is because generally the company must add layers of management to grow the company. As small privately-held companies grow in size, multiples will be lower even though earnings will be greater. The numerator and denominator determine a multiple. It is important to understand that a multiple is NOT a valuation indicator. It is only the result of dividing one number by the other and warrants investigation and analysis of both the numerator and denominator.
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.
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.