2020 SME Valuation Index – insight into the year ahead for the M&A market

The recently published 2020 SME Valuation Index, produced by UK200 Group shows some interesting insight into the year ahead for the M&A market says Lee Humble, our Corporate Finance Associate Partner.

What does the report show?

  • 2020 EBITDA mean tracks in line with the five-year average.
  • The EBITDA median has dropped – no doubt a function of the fall in average deal size.

Source – 2020 SME Valuation Index

P/EEBITDAAv. Deal Size
MedianMeanMedianMean£m
20207.08.35.46.04.1
20197.88.15.86.15.0
20188.08.95.56.04.4
20175.47.34.26.23.4
20166.89.65.46.14.2

What happened around the period of lockdown 1.0?

What the above stats don’t show is the contraction post COVID -19 – with average deal size falling to c£3.6m, and mean EBITDA multiples which dropped to 5.5 (from 6.4 pre lockdown) and the median falling to 4.8 (from 5.9 pre lockdown)

What does this mean and what should you be aware of?

M&A confidence dropped across 2020 which was an obvious response to the variation in trading performance of most transacting parties and lingering uncertainty posed by Covid-19.

However, recent deal volumes have picked up, with BREXIT and the Spring Budget driving confidence.

As a result, Private Equity are leading a lot of deal flow and falls in valuation will be a function of limited appetite from large banks to support transactions, however debt-led deals are still taking place with second tier/alternative lenders with higher pricing, being the main driver.

What do we expect now?

  • Deal markets will shift across 2021 with insolvency led M&A increasing in prevalence.
  • Pricing/valuation will stutter in some markets, albeit not all – some “Covid businesses” with longevity will price well.
  • Private Equity will continue to drive deal markets and a lack of quality supply could lead to strange valuations in obvious sectors including tech/tech-led/pharma/medical.
  • Vendor financing will continue to be crucial in the small-capital space and we also expect to see paperless/mergers increase in frequency.

Contact

Please do reach out if we can be of any assistance or you need further information, by emailing me at lee.humble@taitwalker.co.uk.

Our experienced team provides strategic advice on a full range of financial and corporate transactions for SMEs, family businesses and international groups. We have advised on over 400 deals and have a Corporate Finance Team of seven dedicated qualified accountant professionals, together with five Transactions Tax Specialists.