Talking Deal Prices: Middle-market GPs see better deals below $5 mln EBITDA

Most agreed competition for deals kicks in much harder above $5 million of EBITDA, causing some to look at smaller transactions. Once deals get into the range of $8 million to $10 million in EBITDA, purchase price multiples often move up and beyond the 10x EBITDA level.

Jim Snyder, partner at HKW, said the Indianapolis-based firm uses three staffers on its sourcing team to cover 65 markets and look at about 1,200 possible deals every 12 months, all to close three or four acquisitions a year.

So far, HKW’s Fund IV, which closed on $319 million last year, has an average purchase price multiple of 5.7x EBITDA for its acquisitions.

“We think there’s value to be had at the very low end,” Snyder said. Among its deals, HKW paid about 5.5x EBITDA for a service industry company with high margins. On the higher end of its range, the firm paid about 7x EBITDA for a niche distribution company. (Snyder said in a follow-up interview he couldn’t name the companies due to confidentiality agreements.)

“We have a very wide funnel at the top,” Synder said during the “Dealmakers Roundtable” on March 24 at Buyouts East in Cambridge, Mass.

HKW currently has three deals under letter of intent, but it sometimes pulls back from larger acquisitions, he said.

“As we bid on deals of $12 million to $15 million in EBITDA, we’re still seeing prices at a level where we choose not to play,” Snyder said. “It doesn’t fit into our model.”

Devin Mathews, co-founder and partner at ParkerGale, said he sees fewer opportunities at purchase price multiples in the 5x to 7x EBITDA range as a specialist in technology buyouts.

Mathews’ former firm, Chicago Growth Partners, paid about 7.1x EBITDA for World 50, a carve-out from EquaTerra, formerly a portfolio company of Oak Investment Partners. Today the deal is tracking at a 3.5x to 4x return, while continuing to grow, Mathews said. It was bought outside a traditional auction process since the firm knew the management and offered to fix a distressed situation at the time.

By contrast, Chicago Growth paid about 11x EBITDA in a competitive auction for Marathon Data, a provider of software that helps landscapers and others run their businesses using their mobile phones. Even though it sold for a higher multiple, Marathon is tracking to deliver a better cash-on-cash return than the proprietary deal for World 50, Mathews said.

“Fifteen years ago things were too expensive; 10 years ago things were too expensive; five years ago they were too expensive,” Mathews said. “We get paid to go find the pockets of opportunity.”

It’s often not a question of paying more or less than 10x EBITDA for a company, but how good the investment is at any multiple, he said. 

“’I’m not sure the data shows that deals bought for over 10x EBITDA perform any worse than deals that get bought for 5x or 6x EBITDA,” Mathews said. “If you overpay for a bad business, it’s a bad business; if you underpay for a bad business, it’s a bad business. We don’t know what the market is going to do. We can only prepare for it. Be conservative. Leave a little safety in the system, be in a good end market and don’t be a forced seller.”

Mathews pointed out that even breweries are selling for EBITDA multiples in the mid-teens.

Paul Carbery, managing partner at Frontenac Co, said the firm’s purchase of Whitebridge Pet Brands marked a premium multiple in the high single-digit range, while a deal for Van De Bries Spice Corp, an ingredients maker, qualified as more of a value deal with a lower multiple.

“We continue to see opportunities to deploy that make sense to us,” he said. Frontenac uses a technique called CEO1ST to start dialogues with executives seeking ideas or based on an investment thesis.

”Our approach is a little different,” Carbery said. ”We’re looking for businesses that probably aren’t ready to transact at true premium multiples.”

Year’s largest take-private to sell for 5x 

The Permira Funds and Canada Pension Plan Investment Board are paying about 5x revenue for Informatica Corp for a total purchase price of $5.3 billion. The deal ranks as the largest announced take-private deal so far in 2015.

Considering the company’s EBITDA grew by 66 percent in 2014, it may be worth it. But take-privates remain rare as strategic buyers step up.