Across almost every aerospace industry segment, pricing multiples are down, and owners of middle-market businesses considering the sale of their businesses are anxious over the recession’s impact on upcoming decisions to sell.
If your business has been negatively impacted by the recession, this may not necessarily be the best time to sell; however do not let “conventional wisdom” stop you from selling if 2009 was a good year and you are confident that your prospects never looked better.
Why Multiples Do Not Matter
When finance professionals mention “pricing multiples”, they are referring to the median price “comparable” publicly traded companies receive in the stock market, or the median price owners of “comparable” companies receive when selling their business, as a multiple of their trailing twelve months’ sales or EBITDA. While what constitutes a “comparable” set of companies may be a matter of debate (e.g., comparable size, industry segment or some set of performance metrics), what cannot be denied is that by definition, 50% of all companies are above the median, and 50% are below the median. In other words, medians only matter if you are median company – or share the characteristics of a median company.
For example, while the median price owners of middle market aerospace & defense companies received since January 2008 was 1.25x sales, that median masks a wide range of transaction-specific prices, as depicted below.
A&D Middle Market Sales Multiples (Prices) since Jan. 2008:
Frequency Distribution based on Comparable Transactions
Middle market defined as deals < $100M annual revenues. Source: PCE analysis
What Does Matter and Why it Matters Now
What matters most is not the industry’s performance as measured by median multiples, but the specific performance of one’s own company – especially if the company’s profitability and growth rate exceed that of the industry. Since we find that buyers favor using the discounted cash flow method of valuing a company, an owner should focus on his company’s future performance and not just past performance. In a recession, a strong company’s performance differentiates it from the crowd – and any strong company that accepts median multiples is allowing itself to be undervalued.
While financial buyers have been sidelined by the credit crisis, strategic buyers with strong internal cash positions generated in recent years from the defense-side of our sector have tremendous appetites to buy companies that provide access to key domains, customer segments and locations, or that fill gaps in important capabilities. From a buyer’s perspective, multiples have returned to reasonable levels – but just because conventional wisdom says “this is a buyer’s market” does not mean owners of strong companies have to settle for median prices.
What Moves a Company to the Right of the Frequency Distribution Chart
If you are approached by a potential buyer and he makes a highly preliminary offer based on your last year’s sales or EBITDA, it will very likely be based on industry multiples. In the absence of performing a discounted cash flow analysis on your company’s projected performance, there are the certain items that would indicate your company may be worth more than just median industry multiples:
- Economic fundamentals: Above-industry growth rates and above-industry profitability – not just in the past, but also in a credible forecast.
- Possession of technical, domain or channel gaps: The more critical or robust those gaps, the more valuable your firm.
- The nature of the buyer: Certain firms have reputations for consistently paying above market prices. How does the company that approached you stack up?
- The team you have assembled to sell your firm: Companies that hire professional advisors receive a median 33% higher price than those that do not. That premium is even higher in sectors where industry relationships and knowledge is especially important in articulating the company’s value proposition.
The key to selling your company in a recession is knowing what your company is worth, knowing why a buyer is interested in your company (i.e., understanding their value motivations), selling to the right buyer (refer to our article Identifying Buyers of Choice) and assembling a superior deal team to achieve the best price, terms and conditions.
In our next newsletter we will discuss practical aspects of selling one’s business during a recession.