Manufacturing was the most active industry for closing deals valued at $75 million or less in the first quarter of 2016, according to a new survey released by CMF Associates, private equity’s preferred operating partner for finance and financial leadership.

The survey also found that more than 80% of M&A firm respondents focusing in the lower middle-market closed at least one deal in the first quarter, and manufacturing deals were followed closely by deals in software and technology, business services and distribution and wholesale.

The findings are the result of a newly launched survey series by CMF. Known as the “Down Low” Report, the survey will provide quarterly updates on M&A activities and trends in the extreme lower middle market, or deals with an enterprise value of $75 million or less. CMF has a network of more than 3,000 contacts at 1,200 middle market M&A firms, and quarterly survey results will be based on responses to a brief questionnaire sent to these contacts.

“Our aim is to capture more relevant data on extreme lower middle-market M&A activity and provide a real-time barometer to those working in this market segment,” said Dan Mahoney, Director, CMF. “We are very pleased to see that the results of this ingnagural survey coincide with what we are seeing in the broader M&A market. Having worked on a number of transactions in each of the leading industries, we were not at all surprised to see manufacturing and software and technology deals at the top of the list in terms of volume of closed transactions.”

Results by Industry Segment

While more than 80% of respondents reported closing at least one transaction in the first quarter of 2016 more than 15% reported closing three or more. The top trending industries closing transactions include:

• Manufacturing – 18.9%
• Business Services –18.9%
• Consumer/Retail, Food & Beverage – 10.8%
• Software and Technology –9.5%
• Distribution / Wholesalers – 8.1%
• Healthcare – 6.8%
• Telecom – 5.4%
• Aero /Def, Construction – 5.4%

All other industries accounted for 8.1% of all closed transactions.   

Top-Line Revenue, EBITDA and Multiples
 
From a top-line revenue standpoint, more than 37% of respondents said they completed transactions in the $5-10 million range, 16.4% reported $11-20 million, 17.9% reported $21-30 million, 7.5% reported $31-40 million, 6% reported $41-50 million and the remaining 15% reported more than $50 million.
 
In terms of EBITDA, more than 47% of respondents reported closing deals for companies generating between $3 million in EBITDA or less, and more than 70% of this group reported closing deals at $5 million in EBITDA or less.
 
Purchase price multiples followed a traditional bell curve, with a peak of 20% of closed transactions in the 6.1-7.0 x EBITDA (38.5% of all respondents reported multiples between 5.1-7.0 x EBITDA). Approximately 13.8% of deals reported closed in the 3.1 – 4.0 x EBITDA range and 15.4% closed in the 4.1-5.0 x EBITDA range.

“There are some valuable takeaways, for sell side investment bankers, investors and service providers active in this smaller arena of M&A activity,” Mahoney added. “The EBITDA and free cash flow multiples also speak to the health of the markets, with investors willing to pay for quality assets, whether they are new standalone investments or tuck-in opportunities for a corporate holding or existing platform business backed by a private equity fund.”
 
Strategic Buyers Most Active

Buyer types were heavily weighted toward strategic buyers at 39.4%, while new private equity platforms accounted for 30.3% and private equity-backed strategic (add-on) deals ranking third at 16.7%. Notably, no groups reported closing a deal with a foreign investor.
 
Geographically, the transactions were relatively evenly spread throughout the United States: Midwest (23.9%), West Coast (23.9%), Northeast (19.4%), Southeast (17.9%), and Mid-Atlantic (10.4%).

Survey Timing and Methodology
 
At the conclusion of the first quarter 2016, a brief questionnaire focusing on deal closing activity during the quarter was sent to CMF’s network of 3,000 contacts at more than 1,200 sell-side investment banks and business brokers operating in the lower middle market (enterprise value of $75 million or less). The survey was open for approximately two weeks.
 
“We believe the results are very positive and indicative of market expectations for business owners exploring the idea of a sale or sell-side advisors seeking to generate new business by having a stronger sense of the market below $75 million in enterprise value,” Mahoney concluded.

CMF Associates, LLC, private equity’s preferred operating partner for finance and financial leadership, delivers transaction- and transition-focused financial, operational, and human capital solutions to private equity backed portfolio companies. Headquartered in Philadelphia and with offices in Chicago, New York, and Vancouver, CMF’s offering includes interim CFO, COO, and controllership services; M&A advisory including pre-transaction due diligence, carve out services and post- transaction integration; full-time executive search; and deal sourcing.