The third Canadian issue of the monthly executive brief providing M&A market insight for C-level management and their professional advisors.
We have been hearing the “size matters” mantra as it pertains to deal valuations for some time now, and for transactions over $50 million in total equity value (TEV), data shows that mantra to be holding true. However, for transactions in the lower end of the middle market investment industry ($10 to $50 million TEV), valuations have remained fairly steady for nearly a decade. The result is a widening spread between larger and smaller deals, with the 2011 spread twice that of 2010. While other variables in the selling equation have experienced fluctuations (such as earnouts, vendor notes, reps and warranties, and customer retention requirements), the valuation variable has not been as great a factor as many would believe, especially in the lower end.
Of interesting note, when one examines private middle market company sales (both larger size companies sold as platform acquisitions and smaller companies sold as add-ons), slight premiums are actually being paid for the smaller investments. Why?
Private equity (PE) investment models call for the purchase, growth and subsequent sale of companies in their portfolios, typically within a 5 to 7 year time frame. The PE firm can either choose to grow their larger platform investments organically, or accelerate the growth rate through the acquisition of smaller add-on companies. With the clock ticking on their companies’ investment portfolios, many private equity firms are choosing to implement the add-on strategy for growth. The PE firms seek to acquire smaller yet solidly performing companies and are willing to pay a premium in the process.
For additional information contact:
Douglas Nix, CA | Vice Chairman
Corporate Finance Associates | Toronto West | 905-845-4340 x211 | firstname.lastname@example.org