The 2023 Pepperdine annual private cost of capital survey is just out! The survey captures the current views and behaviour of finance professionals, including, Private Equity (PE) firms, business brokers and business appraisers.
This year while only sixty four brokers and fifty eight PE firms took part, an impressive three hundred and twenty seven business appraisers completed the survey. Business appraisers clearly have time on their hands!
Whilst the survey is simply opinions, it can be interesting to see how professional peers are doing (or say that they are doing) their valuations and what methods and multiples are currently favoured.
Favourite business valuation method
According to the survey, PE respondents placed their largest faith in the Discounted Cash Flow (DCF) method with a 29% weighting, followed by the capitalisation of earnings method at 27%.
This is a change of heart. Last year PE respondents favoured the capitalisation of earnings at 28%, over DCF at 25%.
Business appraiser respondents reliably took the same stance as last year, placing most of their eggs in the DCF basket with a weighting of 36%, followed by the capitalisation of earnings approach at 24% and the guideline company transactions method with a meagre 16% weighting.
Favourite earnings multiple
With regards to multiples, the PE respondents really like to use a recast EBITDA multiple, with a 39% weighting (up from 36% from last year), followed by a good old regular EBITDA multiple with a weighing of 25%.
Business appraiser respondents also really like to use the recast EBITDA multiple, even more so, at a whopping 45% weighting.
Surprisingly though, the next multiple in the basket for business appraisers is the revenue multiple with a 22% weighting whereas PE firms put revenue multiples at the bottom of their basket at 4%.
PE firms and business appraisers both agree, however, that the poor old EBIT multiple is out of favour, with business appraisers only applying a 6% weighting and PE firms applying 5%.
Deal size multiples & practicalities of selling
According to the business brokers, EBITDA multiples paid by deal size ranged from 4.8 times (up from 3.9 last year) for deals of $2m to $5m to 5.0 times for deals of $5m to $50m.
Surprisingly, PE funds appear to be paying slightly lower multiples with average EBITDA multiples of 3.0 times (up from 2.6 times last year) on EBITDA’s of $1m and 4.1 times on EBITDA’s of $5m.
In addition, PE funds expect increasing average revenue growth of 22%, up from 16% last year, and EBITDA growth of 18%.
According to the business broker respondents, the practicalities of selling and the impact on value include that:
- the median time from listing to close in $2m to $50m deals is nine months; and in
- deals of $5m to $50m the median selling price is 7% lower than the asking price.
Summing up
The PE and appraiser respondents adamantly favour a DCF method and a recast EBITDA multiple to value a business. Read the full detailed survey results here: https://digitalcommons.pepperdine.edu/gsbm_pcm_pcmr/16/
