Construction, Consumer, Healthcare Lead in Q3 2016 For Closing Deals Valued At $75mm And Below New CMF Associates Survey Finds

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The construction, consumer and retail, and healthcare industries were the most active in closing deals valued at $75 million or less in the third quarter of 2016, according to a new survey released by CMF Associates, private equity’s preferred operating partner for finance and financial leadership.

“To date, our survey has captured information from more than 225 transactions closed in 2016 with enterprise values of $75 million or less.”

The construction, consumer and retail, and healthcare industries were the most active in closing deals valued at $75 million or less in the third quarter of 2016, according to a new survey released by CMF Associates, private equity’s preferred operating partner for finance and financial leadership.

Construction and consumer and retail deals each accounted for 17.9% of all deals closed, followed by healthcare at 14.3% and manufacturing at 10.7%. The survey also found that more than 82% of M&A firm respondents focusing in the lower middle market closed at least one deal in the third quarter.

The findings are the result of a new survey series launched in the first quarter of 2016 by CMF. Known as the “Down Low” Report, the survey provides quarterly updates on M&A activities and trends in the extreme lower middle market, or deals with an enterprise value of $75 million or less. CMF has a network of more than 3,000 contacts at 1,200 middle market M&A firms, and quarterly survey results will be based on responses to a brief questionnaire sent to these contacts.

“To date, our survey has captured information from more than 225 transactions closed in 2016 with enterprise values of $75 million or less,” said Dan Mahoney, Director, CMF. “We continue to find these results extremely relevant for our network of capital providers -- PE funds, family offices and high-net-worth individuals -- as well as our senior lending and sell-side advisor communities.”

Results by Industry Segment 

While more than 82% of respondents reported closing at least one transaction in the third quarter of 2016, more than 14% reported closing three or more. The top trending industries closing transactions include:

1.    Construction/Engineering – 17.9%
2.    Consumer/Retail, Food – 17.9%
3.    Healthcare – 14.3%
4.    Manufacturing – 10.7%
5.    Food & Beverage –7.1%
6.    Software/Technology – 7.1%
7.    Apparel – 3.6%
8.    Business Services – 3.6%
9.    Distribution/Wholesale – 3.6%

Top-Line Revenue, EBITDA and Multiples
 
From a top-line revenue standpoint, 48.3% of respondents said they completed transactions in the $5-10 million range, 17.2% in the $11-20 million range, 10.3% in the $21-30 million range, 10.3% in $31-40 million range, 3.4% in the $41-50 million range and 10.3% reported closing deals above $50 million.
 
In terms of EBITDA, nearly 66% of respondents reported closing deals for companies generating $3 million in EBITDA or less, while 10.3% reported closing deals for companies generating between $3.1 and $5 million. The balance of the respondents reported deals with EBITDA of $5.1 to $7 million (13.8%) and over $7.1 million (10.3%).
 
Purchase price multiples saw a peak of 24.1 % of closed transactions in the 3.1-4.0 x EBITDA, while 58.6 % of all respondents reported multiples between 3.1-6.0 x EBITDA. Approximately 21% of deals reported closed in the 5.1-6.0 x EBITDA range, 10.3% closed in the 6.1-7.0 x EBITDA range, and 24.1% of reported deals closed at a multiple of 7.1 or higher.

But in special situations, there are always exceptions. Bill Peck of Ascendiant Capital Markets, cites an example:

“The seller was a wholesale distributor of electronic automation products for which the OEM would approve only 2 buyers, both of whom knew the other would be negotiating to buy the business. The highly competitive auction between 2 strategic buyers resulted in an EBITDA multiple of 9 in an industry where 5 to 6 is the norm.”

Strategic Buyers Most Active

Buyer types were heavily weighted toward strategic buyers at 48.3% while new private equity platforms accounted for 24.1% (up from previous quarter result of 14.6%). Private equity-backed strategic (add-on) deals came in at 6.9%. High-net-worth investors and family offices accounted for over 20% of reported closed deals, slightly down from previous quarter (22%).

For the third quarter, more than 53% of closed deals reported no senior debt issued at close. This would be consistent with strategic acquirers that pay for smaller acquisitions from existing cash or corporate lines of credit.
 
Geographically, the transactions were concentrated in the Northeast (34.5%), Midwest (24.1%), West Coast (24.1%), with the Southeast accounting for 10.3% and Mid-Atlantic 6.9%.

“Anecdotally, we are hearing more private equity funds are willing to pay up for higher quality platform assets and dollar cost averages lower through smaller bolt-on acquisitions,” said Dan Mahoney. “That appears consistent in our findings in the third quarter and throughout 2016.”

Survey Timing and Methodology
 
At the conclusion of the third quarter 2016, a brief questionnaire focusing on deal closing activity during the quarter was sent to CMF’s network of 3,000 contacts at more than 1,200 sell-side investment banks and business brokers operating in the lower middle market (enterprise value of $75 million or less). The survey was open for approximately two weeks. 
 
About CMF Associates
CMF Associates, LLC, private equity’s preferred operating partner for finance and financial leadership, delivers transaction- and transition-focused financial, operational, and human capital solutions to private equity-backed portfolio companies. Headquartered in Philadelphia and with offices in Chicago, New York, and Vancouver, CMF’s offering includes interim CFO, COO, and controllership services; M&A advisory including pre-transaction due diligence, carve out services and post-transaction integration; full-time executive search; and deal sourcing. To learn more, visit http://www.cmfassociates.com.
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Contact:
Dan Mahoney
Director
CMF Associates
dmahoney(at)cmfassociates(dot)com
(215) 531-7493

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