Which are the Current Opportunities and Challenges in Closing a Middle Market Deal?
This guest blog post is from John Koeppel, Partner and Private Equity Leader at Lippes Mathias Wexler Friedman LLP. Email: firstname.lastname@example.org .
Buyers are hungry for acquisitions in today’s market. Some statistics from the 2016 Pepperdine Capital Markets Report provide a deeper dive into what investment bankers, sellers and buyers (both private equity and strategic buyers) are seeing in the current deal market:
• Industries: Private equity buyout respondents indicated a diverse range of industry targets, with the most targeted industries being Business Services (18%), Manufacturing (17%), Wholesale & Distribution (12%); Health Care & Biotech (11%); Consumer Goods & Services (9%); Information Technology (8%); and Financial Services & Real Estate (7%).
• Number of Deals: Approximately 69% of private equity respondents made between one and three investments over the last twelve months, and a similar percentage expect to do the same number of deals over the next twelve months.
• Deal Size: About two-thirds of buyout investments were in the range between $1 million and $10 million of EBITDA.
• Market Issues: Private equity respondents believe domestic economic uncertainty is the most important current and emerging issue facing privately-held businesses. Other issues include: access to capital; government regulations and taxes; economic uncertainty (international); political uncertainty / elections; competition from foreign trade partners; and inflation.
• Sellers Going to Market: On the sale side, some of top reasons cited by sellers for going to market are owner retirement (52% of survey respondents); desire for a recapitalization; desire for new opportunity / business expansion; and owner burnout.
• Deal Hurdles: According to investment banker survey respondents, the top three reasons for deals not closing were valuation gap (40%), unreasonable seller or buyer demand (21%), and lack of capital to finance the deal (9%).
• Valuation: When using multiples to determine the value of a business, the most popular methods used by respondents when valuing privately-held businesses were recast (adjusted) EBITDA multiple (59%), revenuemultiple (13%), cash flow multiple (10%) and EBITDA (unadjusted) multiple (10%) approaches.
• Valuation Gap: Of those transactions that didn’t close due to a valuation gap in pricing, approximately 35% had a valuation gap in pricing between 21% and 30%.
• Other Deal Consideration: Approximately 35% of deals closed in the last 12 months involved a Contingent Earn-out. Other common consideration components of closed deals included Seller Financing / Seller Note and Equity Rollovers.
• Financial Buyer: Just under half of all deals involve financial buyers. For financial buyers, about two-thirds of their recent deal flow were platform investments, with the remaining one third being follow-on investments.
• Challenging Deal Sourcing: In order to close a single deal, buyers reported the following median statistics:
- review of 73 investment banker pitch decks on target companies,
- followed by 11 target company meetings;
- leading to 5 letter of intent (LOI) submissions; and
- ending in 2 LOI executions (of which, half often did not make it to close).
 Everett, Craig R., “2016 Private Capital Markets Report” (2016). Pepperdine University Graziadio School of Business and Management. http://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr