Private Capital Report (Part 1)

The following are highlights relevant to facilitating private capital deals extracted from the Pepperdine University Private Capital Markets Report 2014. The report covers all privately held companies and not just main street businesses with revenue between $0 and $5 Million.

Business Types

Approximately 20 % of all transactions closed in the last 12 months (from a sample of 120 deals) involved manufacturing, business services (17%) and consumer goods and services (12%).Other business types in the mix included Manufacturing, Business services, Consumer goods & services, Financial services & real estate, Information technology, Health care & biotech, Wholesale & Distribution, Basic materials & energy, Media & entertainment, Construction & engineering.

Closing Rates

More than 30% of deals put in the market were not transacted. The top three reasons for deals not closing were valuation gap (26 %), unreasonable seller or buyer demand (21 %), economic uncertainty (12 %), and insufficient cash flow (12 %). Other reasons deals did not close include insufficient cash flow, Lack of capital finance and seller misrepresentation. For deals that did not close because of valuation gap, the gap was between 20% and 30%. 84% of deals required between 6 months and 12 months. The median time required to complete a deal seems to be between 8 to 10 months.

Typical items required to close a deal include reviewing Business Plans (1st quartile), meeting with the business and all stake holders (2nd quartile), creating proposal letters, term sheets and signing the letter of intent (3rd quartile).

Valuation

The most popular methods used to value privately held businesses were: Recast (adjusted) EBITDA multiple (58 %), Revenue multiple (13 %) and EBITDA (unadjusted) multiple (10%). Other methods used to value privately held companies include cash flow multiple (9%), Net income multiple (4%) and EBIT multiple (3%).  Overall, re-casted EBITDA multiple and EBITDA multiple account for more than 2/3rds of all valuations completed.

For example, manufacturing businesses with EBITDA between $0 and $1 Million had an average multiple of 3.8.  Across all business types the average multiple for companies with EBITDA between $0 and $1 Million was 4.2. The average multiple for a business type increases as the EBITDA increases. For example, construction businesses with EBITDA between $0 and $1 Million had an average multiple of 3, but with EBITDA between $11 and $25 Million had an average multiple of 10.

There was a shortage of capital for companies with less than 10 million EBITDA and excess of capital available for companies with more than 10 million EBITDA.

Deal Structure

Business deals can be structured using several instruments including Cash at Close, Seller Financing, Earn out, Mezzanine Financing and Seller Retained Equity.  Approximately 40% of deals closed included contingent earn-outs covenants. Other financial instruments used to close deals included Seller Financing (30%), lowered multiple of EBITDA (20%), Rollover (17%) and adjusted amount of equity sold (13%).

One must determine the buyer person before negotiating a deal. Buyer personas include financial buyers, strategic buyers, passive investors, life-style buyers and so on.  One would expect strategic buyers to pay a premium, but report found 29% businesses sold to a strategic buyer did not witness a premium. 52% if businesses sold to a strategic buyer witnessed a premium of 1% to 20%.

Business Environment

The most important issues currently facing privately held businesses are Domestic economic uncertainty (34%), Access to capital (24%), Government regulation and taxes (20%), Political uncertainty / elections (9%), Global economic uncertainty (6%) and Inflation (3%). Domestic economy and government regulation are the biggest issues facing private held small and medium sized businesses followed by access to capital.  For smaller privately held companies, one would expect the main issues would be domestic uncertainty, access to capital and competition.