The June issue of our Valuation & Litigation Briefing talks about the challenges of valuing a business in a struggling economy. Our Valuation Group decided to expand on that segment and include a discussion about general market conditions that should be considered in a business valuation. The overall climate has a direct impact on pricing multiples considered by the appraiser. It also impacts discounts for lack of marketability when an appraiser is making a judgment about how long it might take to sell a business in the climate.
2009 was a year marked with slow activity in the M&A world. This can be seen in the private equity market for closely held companies. According to PitchBook, U.S. private equity deal flow for 2009 was down 50% from the prior year. Most of the deals completed in 2009 were lower to mid-market deals. Private equity investment seemed to turn a corner in the fourth quarter with deal flow increasing for the first time in a year. 2010 will continue to provide plenty of challenges for private equity investors, but if the economy continues to stabilize and debt becomes more available, 2010 should prove to be a more fruitful year than 2009. According to GF Data Resources (firm specializing in tracking private equity deal data), Private Equity buyouts for the year 2009 experienced a decline in volume and pricing multiples. For the first part of 2009, market conditions were so restrictive that only exceptional companies were finding buyers. Exceptional companies are defined as those with EBITDA margins in excess of 10% and revenue growth in excess of 10%. As the year continued, companies with lower margins and revenue growth entered the marketplace and received lower multiples.
The following table shows the trend of a common pricing multiple based upon earnings before interest, tax, depreciation and amortization (EBITDA). The chart shows that in 2008 the multiples for all three revenue categories (0 to $1m, $1m to $5m, and $5m and above) began to fall. They remain at low levels for 2009. The data below is provided by Pratt’s Stats a provider of data on sales of private companies.
If you would like to discuss how the current climate may impact the value of a company you are working with, please give The Valuation Group a call at (626) 857-7300 to arrange a convenient time to talk.