Feelings around GARP multiples in the Lower Middle Market

November 24, 2020

by a searcher from Columbia University - Columbia Business School in New York, NY, USA

As we have seen in 2020; this has been a year of food fights in the lower middle market - especially in the healthcare, business services and light manufacturing spaces. As we know valuation is more of an art than a science and the investing culture of a firm or a sponsor will dictate their comfort around higher multiples but I am curious what the consensus is around businesses that deliver steady state FCF in this current environment. It feels like multiples - especially in auction situations lose all mooring with reality - we are seeing businesses with sub 5MM EBITDA going for high single digit and one at 10x multiples. I know we may sound like the old value investors we are but I am curious as to the community's thoughts around these situations ?

Reply by a searcher
from Princeton University in Annandale, Clinton Township, NJ, USA

In my experience, there is a big valuation gap for companies with <$1mm EBITDA and those above. If above, they are big enough to be attractive add-ons for institutional investors and there's an assumption around level of stability (probably rightly so). Above $2mm, start to get into the low end of institutional investors and multiples start aligning more with middle-market PE

Reply by a searcher
from Case Western Reserve University in Cleveland, OH, USA

As one data point for a search that is Northeast Ohio based, I've had deals <$1.5M EBITDA that I've lost for offering in the 4's. My takeaway is that I would have needed to be about 5x to move forward.

+3 more replies.

Join the discussion