Strong Business Valuations For 2022

Purchase price multiples are hitting historic levels in many sectors as the current M&A market is flush with liquidity. Strategic and financial buyers are competing for the most desirable assets. This is great news for a business owner looking to sell a healthy company right now because pricing is more aggressive and terms are much more favorable.

High-quality businesses operating in defensive sectors, such as healthcare and utilities, are seeing far more interest and capital influx than businesses that have been hurt by impacts of the COVID-19 pandemic, or those that operate in more cyclical fields. The companies performing above average are garnering inflated valuations. Buyers are focusing on finding the businesses that may have enjoyed a boost from the pandemic and aim to mitigate risk by normalizing EBITDA to be more indicative of steady earnings, or arranging deals with more caution. Larger transaction size is also factoring into the higher valuations being seen in the current market.

The Demand is High
There is also plenty of pent-up demand for deal making, making it a borrower-friendly market in many sectors. Since the global economy has bounced back from the earlier impacts of COVID shutdowns, private creditors have been very active. Low interest rates have fueled high levels of private equity activity, although interest rates are expected to go up in 2022. Investors are still sitting on tons of dry powder. And credit has also been widely available.

This is a time when financial buyers are eager to deploy capital for quality deals. 2021 blew the doors off any other period in history. There was record-setting deal volume in the third quarter of 2021 for private equity deals in the U.S. A whopping 6,004 deals were closed, totaling $787.6 billion in nine months. That is above the highest-ever numbers for full years. This deal frenzy is expected to carry over into 2022. Valuations were also very strong for the period, with a median purchase price multiple of 12.8x EBITDA.

Lower- and Middle-Market Activity
For lower middle-market private equity deals (valued at $10 to $250 million), average valuations rose to 7.6x EBITDA in Q3, with the deal valuation premium inflating with transaction size. Average lower middle-market leverage increased to 4.1x total debt during the same quarter.

Middle-market issuance exceeded $78 billion in Q3 2021, stimulated by a continually expanding direct-lending market. Leverage multiples in the broader middle market increased to 5.7x total debt in October, with a purchase price multiple of 10.9x EBITDA for all leveraged buyouts.

Strategic Buyers
Strategic buyers have shown a bit more selectivity in their acquisition targets. But when the right deal comes to market, they are acting more quickly and more aggressively regarding valuations and deal terms. There have been strong valuations across the size spectrum, and little difference in EBITDA multiples between the lower and upper middle markets, at 10.6x and 10.9x, respectively.

Is It Your Time to Sell?
This healthy M&A market is expected to keep going strong in 2022 as economic growth continues and capital markets keep seeing deal making, so valuation multiples should remain high. This is all very good news if your business is doing well and you plan on selling this year because you could cash out with a higher value. But this also means you should keep in mind that you will not be the only one looking to sell (especially with the threat of possible tax hikes) meaning there could be a much more competitive market.

A quality M&A advisor can help guide you through this difficult decision-making process and determine what is best for your business, whether it is to sell now or wait for a more appropriate time.