Aldrich Capital Middle Market M&A Update—First Quarter 2024

After two years of decline, the M&A market rebounded in the fourth quarter of 2023. That momentum carried into the new year, albeit not as strongly as the late stages of last year.   

While some concerns persist, macroeconomic headwinds have lessened, and liquidity concerns are improving. Private equity investors continue to hold significant cash, also known as dry powder. The possibility of lower interest rates is improving the deal outlook. In addition, investors are encouraging private equity sponsors to use their capital for investments. 

Two factors are driving investor demand for companies valued at less than $100 million: 

• Corporate buyers are seeking avenues for growth, frequently through strategic acquisitions. 

• Private equity sponsors must deploy their substantial capital reserves to begin yielding returns for their limited partners. 

Lower-middle market companies valued between $10 million and $100 million often attract buyers. These companies have potential for growth, strong niche market positions, and are scalable.  

According to GF Data’s 2023 highlights, valuations on completed deals through the end of 2023 averaged 7.5 times Trailing Twelve Months (TTM)-adjusted EBITDA. This is a 0.2x increase from the third quarter and surpasses the 6.7x average in the second quarter of 2023. However, average multiples for the year slightly dipped to 7.3x, in contrast to the 7.6x averages in 2022 and 2021. 

As 2024 progresses, valuations remain under pressure but seem to be staying on par with the year-end 2023 figures. Buyers are using seller financing and earnouts more to bridge value gaps in the current market. 

Although there were fewer deals, deal valuation increased toward the end of last year, especially for smaller transactions. Deals valued between $10 million and $25 million saw a notable improvement of more than half a turn toward the end of the year. The average valuation reached 6.6x, compared to 5.9x in the third quarter. 

Deals valued between $25 million and $50 million improved, but more modestly. By the end of the year, the average valuation increased to 7.0x. 

Overall, the first three months of 2024 saw continuous improvement. But regardless of how the market performs, one thing does not change: buyers want quality businesses. Those sellers who are growing, have strong margins, and can scale will almost certainly find interested partners.

Showing meaningful performance trends to the market is critical to maximizing value upon a sale. Establishing these trends will take time. For those business owners contemplating a transaction over the next several years, failing to plan early may mean significant value left behind.

As we approach the third quarter, if you have any questions regarding the trends specific to your industry or need help preparing for an eventual ownership transition, let’s talk.