2018 Fall issue of Horizons

INDUSTRY UPDATE PRIVATE EQUITY

The Emergence of Sell-Side Due Diligence by Ben Barnes, CPA, CGMA & Paul Moritz, CPA

T he upward trend of transactions continues to be strong. Between 2011 and 2017, the number of merger and acquisition transactions completed in the U.S. has increased each and every year. A key contributor to the growth in transaction volume has been the entrance of new private equity firms in the market. According to Business Insider , between 2011 and 2017, the number of private equity-backed companies in the U.S. has grown by 30% and has increased each year during that time period, while the number of private equity firms globally more than tripled between 2010 and 2016. As private equity firms are in the business of completing deals, M&A activity has grown.

The combination of historically low interest rates, growth in the number of private equity firms (which has heightened competition in the M&A arena), active lenders and non- private equity buyers has contributed to the recent trend of high company valuations, and consequently, high purchase prices. According to GF Data , for the middle- market, private equity-sponsored deals valued between $10 million and $250 million, average valuations in 2017 rose to 7.4 times EBITDA (earnings before interest, taxes, depreciation and amortization), the highest valuations since GF Data started tracking deal activity in 2003. Note: multiples have averaged 6.3 times EBITDA since 2003.

The Emergence of Sell-Side Due Diligence

36