Private equity firms paid an average of 13x a company’s annual EBITDA for U.S. leveraged buyouts in 2020 — an all-time high, according to a Reuters report quoting financial data provider Refinitiv. This is not surprisingly to see such report, considering the new normal of valuations for growing, profitable businesses. When I first started my career in 2004, 5x was the standard and a bell weather for what to pay for growing, profitable businesses. Fast forward to today, the convergence of massive influx of private equity capital, low interest rates, public market valuations soaring to unthinkable levels, and the increase of money supply by way of stimulus (25% of dollars in circulation printed in 2020), have all contributed to these record levels being paid.
Now, let us specify who/what/where/how these record-breaking EBITDA multiples apply, as although there is an element of rising tides lifting all boats, this is NOT a linear increase across all companies. As noted in a previous post where we provided a valuation tool for entrepreneurs to gain insight into a valuation framework, there are a number of fundamental value drivers, that dependent on the performance within each driver, will sway the multiple significantly. See below for a breakdown of such drivers, the general correlation of performance to multiple, and the importance of certain drivers vs. others:
What does this mean for entrepreneurs and owners of such businesses? It is an excellent time to pursue a sale to take advantage of the bubble state, as in the near-term, there is much likelier to be a correction than a continued run up in valuations.
Feel free to email us to discuss your existing M&A activities and hear feedback on acquisition options from our network, valuation ranges, likely deal structures, and the buyer universe to consider which may drive the most value. This includes several of the most savvy, tech-focused private equity funds which we have on buy-side agreements and actively collaborate with.