The time to collect deal flow is now: Buyers and Sellers begin valuation convergence
The M&A market for BPO companies has seen a correction of valuations from last year in the 6.5x – 8.5x EBITDA range to this year in the 5.5x – 7.5x EBITDA range. In our Q3 2023 Market Report we detailed the different valuation expectations between buyers and sellers. However, we are now seeing buyers and sellers get closer to converging their expectations under the current M&A landscape to the pre-covid 2018 – 2019 levels. As buyers that are looking to be active in the market, or sellers that are looking at exit strategies, the time is now to collect deal flow to transact in 2024.
The Dynamic for buyers:
As revenue growth has slowed for major companies in the BPO industry and interest rates have risen, making acquisitions has become an attractive option for growth as company free cash flow remains strong. Although many of the major public BPO companies are trading below 6x Enterprise Value/adjusted EBITDA, the recent upper market transaction comps provide a basic benchmark of their ability to sell at 9.5x – 10x adjusted EBITDA. Due to the two dynamics strategic buyers in the industry are motivated to make transactions and view middle market acquisitions in the 7x-8x range as a reasonable investment.
The Dynamic for sellers:
As the slower growing business volumes begin to affect the middle market companies in BPO, there has been a correction in valuation expectations for sellers. The first phase of this correction involved M&A transactions stalling as buyers and sellers held different valuation expectations. The second phase sellers began to remedy the drop in valuation by chasing increased EBITDA in order to maintain a similar enterprise value total as they were seeing in 2022. However sellers have begun to see that it is increasingly difficult to quickly raise EBITDA operating as a standalone business in an environment where sales volumes growth have slowed industry wide. This dynamic has taken sellers into the final phase of the valuation correction where transactions begin to occur in the 5.5x-7.5x EBITDA range, starting with sellers that are pushed into special situations.
Special Situations:
There is an increased potential for businesses to be pushed into a special situation where an exit becomes necessary. These situations could include businesses with balloon payments on loans from 3-4 years ago at lower interest rates or businesses that are backed by Private Equity firms that have held an asset too long. This month a special situation in the BPO industry led to a sale of a company for a 6x multiple plus an earn-out. As the likelihood increases for these special situations to occur, it becomes pertinent for buyers to collect deal flow and have a prior relationship established.
The time for collecting deal flow is now to transact 2024:
Buyers with strong cash flow are interested in making acquisitions, sellers are adjusting to current M&A BPO valuations, and special situations are becoming more frequent. These recent dynamics point towards the possibility that the gap between buyers and sellers valuation expectations is closing. With an increased likelihood of middle market M&A transactions occurring in the near future, now is the time to begin accumulating deal flow as buyers and creating relationships as sellers in order to transact in 2024.
If you’d like to learn more about the most recent market dynamics, or are interested in M&A advisory services please email tallen@yellowstonecapitaladvisors.com
