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What Is The Median Valuation Multiple For Your Industry?

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Most business owners and professionals in the M&A market like to keep tabs on valuation trends and current market-based valuation multiples for business acquisitions.  This article highlights some of the results reported in the Pepperdine Private Capital Markets Winter 2011 Survey regarding some very interesting insights into recent M&A activity, including median industry valuation multiples. 

 

Median valuation multiples can be very informational when looked at in the proper context.  A valuation multiple when combined with the corresponding earnings measure provides an estimate of the fair market value of a company.  Any statistic, including median valuation multiples, should be viewed as a statistical benchmark or reference point and nothing more.  The median valuation multiple represents the point at which 50% of businesses sell for a higher multiple and 50% sell for a lower valuation multiple.  The fair market value of any business is unique to that business and median valuation multiples at best, are a reference point useful for evaluating a specific business within the same industry.  The valuation multiple for a specific business should be derived by a qualified professional and based on the specific factors of the subject company.

 

For the purposes of this article, we have focused on the results of the Pepperdine Survey as reported by investment bankers and private equity groups regarding valuation multiples for select industries.  Investment bankers and private equity groups along with corporate buyers tend to represent the bulk of investors in established lower middle and middle market, privately-held companies.  Venture capitalists and angel investors generally focus on higher-risk, higher ROI, start-up and/or high-growth business investments.

 

The overall median deal multiple based on size of the company as measured by Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) as reported by 327 private equity group investors is summarized in Table 1.

 

Table 1 - Median Deal Multiple By Company Size For All Industries

 

Source: Pepperdine Private Capital Markets Project – Survey Report Winter 2011, Pg. 83, Table 61

 

Table 1 shows a fairly intuitive and well established principle that larger companies generally demand higher valuation multiples compared to smaller companies.  Smaller companies tend to be riskier investments and therefore require a higher return on investment which drives the valuation multiple down. 

 

Based on company size and industry, the median deal valuation multiples as reported by 245 investment bankers is summarized in Table 2.

 

Table 2 - Median Deal Multiple By Company Size (EBITDA) & Industry

 

Source: Pepperdine Private Capital Markets Project – Survey Report Winter 2011, Pg. 29, Table 16

 

On a relative basis, Table 2 indicates that Technology and Healthcare industries demand higher valuation multiples, Service and Manufacturing industries demand moderate valuation multiples, and the Retail, Distribution & Restaurant related industries command a relatively lower valuation multiple.  It is also interesting to note that from a demand standpoint, manufacturing (22.7%), services (16.7%), healthcare (11.2%) and distribution (6.3%) were predicted by private equity investors as the industries to have the highest expected investment activity over the next twelve months.