Impact of Rising Multiples

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October 31, 2024

by a searcher from Columbia University - Columbia Business School in New York, NY, USA

Search funds historically aimed to keep multiples around 5x EBITDA, where cash flow could comfortably support debt without undue risk. Today, median multiples hover around 7x, with deals in many industries reaching 10x or more.

Is the risk profile for the average search fund increasing? Or are we seeing a shift in the typical deal structure (e.g., reducing leverage or adjusting debt terms)?

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Reply by a searcher
from Columbia University in Fairfax, VA, USA
The Search Fund space has certainly gotten more crowded (based on both the number of Searchers and PEs moving down-market for add-on acquisitions) - but there are certainly still opportunities out there. Search Fund returns have been historically high (IRRs of ~30%+)... I think you'll see those returns come down over time as the high returns in this space get competed out.
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Reply by a searcher
from Columbia University in New York, NY, USA
If we're looking at Stanford data, EBITDA multiples have averaged >5.5X since###-###-#### ; >6X since###-###-#### The number of traditional search acquisitions grew from 10 to 20 from 2012 -> 2016, then from 20 to 30 from 2016 > 2023. Competition is perhaps a factor, but the pool of searchers has grown much more since 2016 than has multiples.
The biggest drivers of price multiple is typically the EBITDA amount, the industry, and the growth rate. You see industry taking a toll in 2022, when multiples peaked at the same year that software was the most popular industry. Macro factors obviously had an impact that year as well.
On the other hand, you see EBITDA growth rates rising steadily over the period, suggesting people are paying up for faster-growing companies.
If you expand to consider non-traditional searchers, I think recent statements from many lenders would suggest that people are paying higher multiples and doing so by raising less debt as a percentage of loan value.
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