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Capstone Partners Report on Middle Market M&A Valuations

In a recent release by Capstone Partners, a prominent middle market investment banking firm, the findings from their 2024 Middle Market M&A Valuations Index shed light on the current state of mergers and acquisitions (M&A) within the sector. The report indicated a notable stabilization in middle market M&A activities after a tumultuous year in 2023, marked by significant valuation pressures.

The backdrop of these findings underscores the resilience of the middle market segment despite increased interest rates and ongoing economic uncertainties. Specifically, the report highlighted that average valuations in the middle market have slightly declined, now resting at 9.4x EV/EBITDA in 2024, down from 9.6x in 2023 and 9.9x in 2022. This persistent decline in median EBITDA multiples over the five previous years reflects a narrowing field of competitive bids, indicating a more selective marketplace.

Despite these challenges, certain sectors demonstrated notable resilience. Industries such as Agriculture, Business Services, Consumer Products, Energy, Financial Technology, Healthcare, and Industrial Technology reported year-over-year improvements in average EBITDA purchase multiples, showcasing that specific segments are indeed thriving in this complex environment.

In 2024, buyers displayed a cautious but deliberate approach toward acquisitions. High-quality assets, especially in service-oriented industries, attracted healthy competition. The proportion of deals closing above 10.0x EBITDA sharply rebounded to 56.3%, reversing a substantial decline observed in the previous year. This resilience is particularly acute among essential service providers, which experienced robust buyer interest, as evidenced in professional and technical services.

Further insights reveal that deal sizes in the middle market have increased significantly, with the average enterprise value of targets jumping from $112.5 million in 2023 to $166.8 million in 2024. This change implies a growing willingness among buyers to pivot from smaller acquisitions toward larger, more strategic ones. Significantly, the lower middle market transactions (valued between $10-$100 million) accounted for 40% of the disclosed enterprise value deals, while upper middle market transactions (valued between $250-$500 million) constituted 36%. This reflects a stark shift in focus as buyers begin to capitalize on improving economic conditions.

However, the heavier cost pressures permeating the market can't be ignored. With persistent inflation and the enactment of proposed tariffs, companies continue to navigate a burdensome financial landscape characterized by high financing costs. The U.S. economy has been grappling with elevated interest rates since 2020, a measure taken to curb inflation, challenging an alarming 59.2% of middle market business owners surveyed in 2024. Despite the Federal Reserve's recent interest rate cuts, the anticipated effects on borrowing costs may not be immediate enough to alleviate financial burdens.

Looking ahead, the report underscores the ongoing construction of balance sheets among middle market firms. In 2024, the average gross margin of sold businesses had improved to 41.3%, up from 32.3% in 2023. While high interest rates have constrained the servicing and refinancing of debt, the dynamics surrounding operating income began to recover, with the interest coverage ratio improving from 3.7x in 2023 to 4.3x in 2024. Nonetheless, this remains below the 5.8x median recorded in 2022.

As case studies illustrate, the market is now entering its third year of a protracted M&A downcycle for private businesses, generally expected to last between 12 to 24 months. The undisputed trend points towards an overdue recovery, especially with private equity commencing platform acquisitions again, signaling optimism for improvement.

Moreover, Capstone partners noted data indicating an uptick in private equity activity, with platform acquisitions rising by 4.7% YoY in 2024, marking the first positive movement since 2021. This revitalization, in conjunction with an overall enhancement in macroeconomic conditions, positions the market well for a rebound, spurred by an urgent drive for private equity to deploy capital more effectively.

The report also encompasses a comprehensive breakdown of industry-specific middle market M&A valuations, a discussion regarding transactional volume across different sectors, and an evaluation of operational performances for entities sold in 2024 compared to previous years.

For those keen on delving deeper into the specifics, full access to the report can be obtained by clicking here.

About Capstone Partners

For over two decades, Capstone Partners has established itself as a trusted advisor to leading middle market businesses. The firm offers an extensive range of investment banking and financial advisory services, tailored to assist clients at every stage of their business lifecycle. Based in Boston, Capstone boasts a team of 175+ professionals scattered across multiple U.S. offices, with a keen focus on delivering sector-specific expertise through dedicated industry groups. Capstone is also a subsidiary of Huntington Bancshares Incorporated, listed on NASDAQ under the ticker HBAN. More information can be found on their website: www.capstonepartners.com.