Executing Deals in an Era of 11x Multiples

Here is a great article from Richard Wilson on executing high multiple deals.

Our team closed on an acquisition last week, and while this happened to be a distressed IP deal, a recent report on global mergers and acquisitions valuation predicts that valuations are expected to surpass 11 times EBITDA on average.

Buyers, from newly raised private equity funds to corporations holding too much cash, have helped form a very attractive market for sellers. A few of our buy-side clients have expressed uneasiness with today’s multiples being paid for acquiring businesses and concerns about the overall economy have
mixed with fears of another bubble to make for a wariness by more than a few would-be investors. Still, mergers and acquisitions deal volume showed no signs of uncertainty with 14,000 deals completed last year.

In the midst of this big boom in M&A, a number of family offices and middle market private equity firms that we work with have focused on uncovering “discounted” companies to acquire. Their focus is on those businesses that are undervalued or at least not demanding the same double-digit multiples that are becoming increasingly common today. Based on our work with private companies and family office direct investors, we have developed a few best practices for sourcing deals that haven’t seen their price bid up beyond where a typical acquirer can pay.

Here are a few best practices that you may want to consider.
(Please note, these best practices are by no means a guarantee on valuation, just some of the strategies we see used to find deals off-market and hopefully at a discount to the multiples paid by private equity and institutional buyers.)

1) Avoid the Crowd:

If you are sourcing all of your deals on the most popular deal flow websites exclusively, then you’re limiting your efforts to only one group of companies and it’s a fair bet that you’re not alone. These websites and online platforms are becoming increasingly popular, and for good reason: companies (and the brokers that represent them) have found that they can fetch a higher price sometimes if they let a big pool of deal-hungry buyers bid up the purchase price.

2) Build a Proprietary Deal Pipeline:

More and more, we’re finding private equity firms and family offices building out formalized deal origination teams to work on specific mandates to find companies in a single sector, at a multiple within their target range, and in line with other criteria they provide. These buyers are not looking for the companies on the block that everyone knows about, they’re looking for un-shopped, off-market deals that are found through relationships and active acquisition search. If you can drive your efforts through building your own internal deal flow, or capitalizing on another firm’s acquisition search efforts, then you will have a better chance at finding those deals that are within your parameters.

We became aware of this trend due to being engaged by several wealthy families, leveraging our data and deal origination teams to serve them on the buy-side, helping them find high-quality deals more often.

3) Get Specific:

If you’re looking to buy a company in a specific sector, let everyone in your network know- you’re more likely to get qualified leads that you can pursue doggedly, rather than chasing after every shiny object someone shows you that “might be a fit.” The investors and private equity shops that I know who employ this strategy often find great un-shopped deals in their desired area of focus and have an edge on their competitors because they found it first and built a relationship. Everyone else will still be waiting to hear the company is considering a sale, while you’re signing an Letter Of Intent. Of course, that’s not always the case, but it helps when you’re the first call when someone in your network hears that an automobile parts manufacturer is for sale.

Why do they call you? Because you let your network know exactly what type of company you’re looking for. If you don’t, then you’re lost in a sea of buyers all looking for “profitable companies at a fair value that are open to a sale.” It’s hard to stand out in the minds of your contacts if you’re
saying the same thing as your competitors.