Gunner & Co: Business Valuation Multiples See Market Correction, after Experiencing a Notable Spike

by | Apr 17, 2024

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After a spike in valuation multiples during 2022, the market has seen a correction in Q1 2024, both recurring income and EBITDA multiples seeing a downward trend, according to deal analysis from Gunner & Co., the UK’s leading M&A brokerage and consultancy business. The average multiple for prices based on recurring income has reduced to 3.3X from 3.5X in 2023 and 4X in 2022. Profit valuations, based on ‘Adjusted EBITDA’, have decreased from a peak of 8X in 2022 to 6.7X for the first quarter in 2024, albeit this is not as pronounced as the decline seen in recurring income multiples. The trends indicate that the market is becoming more conservative in its valuations overall, and signals a return to more stable market valuations.

Louise Jeffreys, Managing Director of Gunner & Co. commented “Inflation, leading to expensive debt markets, alongside the restructuring of some buyers’ funding is the main contributor to this decrease and will come as no surprise in the market. If you are postponing a sale to expect better multiples, our analysis suggests prices are unlikely to come back to 2022 highs soon. However, all is not doom and gloom. Despite some softening in average multiples, we still see high quality firms achieving premiums.”

Moving onto valuation approaches, the analysis shows recurring income has continued to be the predominant method of valuation, consistently accounting for 65-75% of the valuation approach, albeit with a marginal decrease last year. Profit still holds significance in determining the return on investment of any deal and influencing the purchase price and as the key favoured approach for more complicated, larger firms with complex cost bases.

 
 

Looking at deal structuring, Gunner & Co’s deal analysis shows that since 2017 there has been a gradual yet consistent shift away from asset purchases toward share purchases within the IFA M&A landscape. In 2017, asset purchases comprised over 55% of the transactions, but in the first quarter of 2024, all offers have been positioned as share purchase, with asset purchase hovering around 30% for the previous 3 years.

 “Whilst the position in the first quarter is unlikely to be indicative of the full year direction, anecdotally there have been more leanings towards share purchases across the board. With the significant pension scheme redresses coming to a close and the most recent FCA direction set out in the ‘Dear CEO’ letter and FCA CP23/24, many buyers are taking the position that an asset purchase is less likely to shield them from future liabilities than it may have historically.” added Jeffreys.

Earlier this year, Jeffreys raised concerns about how regulatory change is likely to become a big motivator to retire and sell, hence will increase consolidation in the advice market. 

 
 

“Valuations spiked during the COVID years, where globally M&A boomed.  More recent market turbulence and inflation have essentially reset trends.  We expect to see business sale values stabilise at levels closer to the years preceding 2020, in the 3.2-3.7X recurring income range.” Jeffreys concluded.

NOTES

  • Recurring income was the chosen valuation approach on 67% of offers analysed, with adjusted EBITDA (profit) and fixed income each making up 16.67%.
  • The average multiple for prices based on recurring income reverts to 3.3X from 3.5X in 2023 and 4X in 2022
  • Profits valuation, based on ‘Adjusted EBITDA’, its multiples have decreased from a peak of 8X to 6.7X for the first quarter in 2024

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