April 5, 2022

The latest valuation statistics from the recently released A/E Business Valuation and M&A Transactions Study reveals some interesting trends, including significantly higher valuation multiples for larger firms and higher equity values across the board due to improved profitability and stronger balance sheets.

The table below illustrates overall enterprise values as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2021. The "minority interest valuation multiples" reflect enterprise values (i.e., the value of a company on a debt-free, cash-free basis) of firms that have traded minority (non-controlling) ownership stakes, typically as part of an internal ownership transition or non-controlling ESOP transaction. The "controlling interest EBITDA multiples" above reflect the enterprise values of firms that have been acquired by, or merged with, another firm. 

Enterprise Value / EBITDA

When survey data are analyzed as a whole, the overall enterprise values were relatively unchanged from the prior year, as illustrated above. However, the aggregated data masks some trends within specific sample segments. 2021 not only brought a robust recovery following the initial impact of the COVID-19 pandemic, but it also brought a sharp increase in merger & acquisition activity, with notable activity among large private equity players. As illustrated below, the demand for larger firms among private equity and larger, well-funded strategic buyers can be seen in the markedly higher multiples paid for larger firms.

Enterprise Value / EBITDA by Size

Valuation multiples, of course, are just one side of the valuation equation. Growth in earnings in 2021, driven by economic recovery and federal spending, has also driven value growth. The surveyed firms experienced net service revenue growth of 6.3% on average and increased profit margins. The average pre-distribution EBITDA margin increased from 16.1% to 16.5% in 2021, and the average pre-tax, pre-bonus profit margin increased from 15.0% to 15.7%. So even with overall average valuation multiples holding steady, the typical firm would have experienced a 7.5% increase in its enterprise value due to revenue and earnings growth alone.

Finally, it's important to note that these enterprise values don't reflect the impact of CARES Act relief that many small and mid-size firms received during the pandemic. Many A/E firms qualified for and received Paycheck Protection Program loans in 2020 and 2021, and most qualified for and received complete forgiveness of these loans. For firms that recovered quickly from the initial impacts of the COVID-19 pandemic, the forgiven PPP loans have left them with unexpectedly strong balance sheets and unusually high levels of liquidity. For the average firm, the impact of PPP loan forgiveness on its equity value, which reflects cash and debt levels, was greater than the increase from earnings growth. 

While we generally think of stock price appreciation as a positive thing, such spikes in equity value can create challenges for firms transitioning ownership internally. Stock-redemption liabilities become more costly, and the financial hurdles for those buying in become higher. These challenges aside, increased liquidity, strengthened balance sheets, and higher stock prices also present opportunities for investment in strategic initiatives, organic growth, and the ability to fund acquisitions. We expect these factors to drive continued M&A activity in 2022 and beyond.

For additional information on ROG's A/E Business Valuation and M&A Transactions Study, click here.