Is anyone seeing lower multiples yet?

August 03, 2020

by a searcher from Harvard University - Harvard Business School in Houston, TX, USA

We have heard conflicting information whether or not multiples have already started to drop due to COVID. Obviously it is very depended on industry but I am curious to hear from the community whether or not their particular industry vertical search has seen multiples start to fall.

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Reply by a searcher
from Stevens Institute of Technology in New York Metropolitan Area, USA

I would just suggest a word of caution. Multiples are used to get an idea of valuation but after due diligence most always values are less than originally indicated. I think that we have only gotten started with Covid-19. I hate to sound pessimistic, but some industries may not rebound at all. They make just get wiped-out altogether. Retail is one sector that comes to mind. This morning Lord & Taylor filed for bankruptcy along with many other well known retailers. Small business owners are always overly optimistic (in-terms of revenue and growth) and unrealistic (about efficiency and expenses). Rather than focus on the multiple, I would look at the numbers for the business within the first 6-months of 2020 and base your valuation on that. I would remind everyone to think about the disclaimer that most mutual fund companies make "Past performance is not indicative of future results". I hope I'm wrong but more importantly don't want to see anyone within the searchfund community get hurt by paying too much. Caveat Emptor!

Reply by an intermediary
from California State University, Northridge in Vancouver, WA, USA

I have deals in three unrelated sectors at this moment. Part of the work involves comparison to multiples. What I found is that sellers are accepting the need for a lower multiple, but they may not need to actually reduce the selling price. It depends on how well the specific company has done in the COVID time period. My findings are that some companies must take a hit (the COVID discount) and some do not have to. Key data is found in the monthly revenue comparison for February through July for 2018, 2019 and###-###-#### One other finding, in one sector I see one COVID resistant operation and one that is about 100 days away from permanent closure. Differentiator in this case appears to be debt forcing the already weak operator to fold which drives revenue and market share to the low debt surviving operator. As it relates to multiples, the failure of one operation will not be included in a survey of sale multiples, but the COVID resistant asset will be.

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