Capstone Partners Reports: Middle Market M&A Valuations Soften, Market Participants are Optimistic for a Recovery in 2024

BOSTON, March 21, 2024 /PRNewswire/ -- Capstone Partners, a leading middle market investment banking firm, released its 2023 Middle Market M&A Valuations Index, reporting that while equity markets largely shrugged off the rapid succession of interest rate hikes in 2023, middle market merger and acquisition (M&A) valuations experienced downward pressure. Elevated transaction costs, uncertainty over projected cash flows, and a reserved private equity buyer pool contributed to average M&A valuations falling to 9.6x EV/EBITDA in 2023, compared to 9.9x in 2022. Several deals that transacted at premium valuations helped to bolster this average, while the median EBITDA multiple fell more drastically to 8.0x EV/EBITDA compared to 8.5x in the prior year. While business owners encountered a challenging valuation environment, several bright spots of the market have provided optimism for resilience and recovery in transaction value in 2024. Notably, average three-year EBITDA purchase multiples in the Business Services, FinTech & Services, Industrial Technology, Technology, Media & Telecom, and Transportation, Logistics & Supply Chain industries improved on a year-over-year (YOY) basis.

Buyers demonstrated heightened discipline in middle market M&A processes in 2023, refraining from overextending themselves to acquire target companies. While high-quality assets still commanded solid buyer interest and competition in bidding, market clearing bids were less frequent than in prior years. In 2023, 31% of transactions closed at 10x EBITDA or higher—a decline from 38% in 2022 and 43% in 2021. This may have coincided with buyers moving to lower levels of the middle market, a common occurrence amid market uncertainty. The average enterprise value of sold target companies amounted to $89.4 million, a substantial drop from $139.3 million in 2022. When buyers did pay premium multiples, typically these businesses had demonstrated gross margin defensibility, healthy revenue visibility, and sustained product or service demand.

Many dealmakers are optimistic that 2023 marked a trough for both middle market M&A volume and pricing, with 2024 positioned to experience a rebound in purchase multiples. Seller and buyer expectations are anticipated to become more aligned after such dislocation post-pandemic, when purchase multiples at times became detached from fundamentals. For the first time in nearly a decade, the cost of money is meaningful, and likely will be for the foreseeable future as the Federal Reserve works to meet its mandate. However, quality companies with sound financials and resilient end markets are poised to garner buyer appetite. Private equity buyers, facing limited partner pressure to generate returns, are expected to reenter the M&A markets in 2024 after sitting on the sidelines for much of 2023. The valuation environment may take some time to recover, but the M&A and macroeconomic environment in 2024 is expected to present a favorable backdrop for many prospective sellers to achieve an optimal exit.

Also included in this report:

• A breakdown of three-year average middle market M&A valuations by industry.
• Discussion of middle market M&A transaction volume on an industry level.
• Commentary on the operating performance of target companies sold in 2023 compared to prior years.

To access to full report, click here.

ABOUT CAPSTONE PARTNERS

For over 20 years, the firm has been a trusted advisor to leading middle market companies, offering a fully integrated range of investment banking and financial advisory services uniquely tailored to help owners, investors, and creditors through each stage of the company's lifecycle. Capstone's services include M&A advisory, debt and equity placement, corporate restructuring, special situations, valuation and fairness opinions and financial advisory services. Headquartered in Boston, the firm has 175+ professionals in multiple offices across the U.S. With 12 dedicated industry groups, Capstone delivers sector-specific expertise through large, cross-functional teams. Capstone is a subsidiary of Huntington Bancshares Incorporated (NASDAQ:HBAN). For more information, visit www.capstonepartners.com.

For More Information Contact:

Sarah Doherty
Director of Market Intelligence
[email protected]
617-619-3310

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SOURCE Capstone Partners