With several interest rate hikes in the books and more expected, the immediate impact of interest rate increases has been felt in the debt markets with the cost of senior debt increasing 190 bps in the past quarter. Senior debt pricing increased from an average of 4.7% in Q2 to 6.6% in Q3 at the same time that the overall TEV EBITDA multiples increased from 7.4x to a record 8.1x TTM Adjusted EBITDA as reported by GF Data.
When businesses are sold the owners receive a multiple of EBITDA. Some business owners like to refer to the multiple as being how many years of cash flow they are giving up to divest of the business and receive consideration now. This is not a correct assumption.
Valuation multiples have held relatively steady through the second quarter of 2022 in the face of continued market volatility, while debt multiples have taken a slight dip in the $25-$50 million and $100-$250 million categories. Valuation multiples remain at or above historical averages in spite of most economic factors pointing to downward pressure on valuations.
Valuation multiples in the first quarter of 2022 have remained relatively consistent with the last three quarters of 2021 and continue to be above the averages of the entire dataset since 2003 as well as the average of the past couple years. Debt multiples have seen a tick up in Q1, and as discussed in our March 2022 Links’ List, valuation multiples and debt multiples are positively correlated.
Recent valuation multiples in all transaction sizes remain at or above the average of the entire dataset since 2003 and above average valuation multiples since the beginning of 2019. As expected, the market experienced some multiple compression over the last quarter pulling down EBITDA multiples and total enterprise values.