Multiple Mayhem

Valuation multiples have fallen.  Everyone knows it.  The industries hit the hardest are healthcare and IT according to data collected from Standard & Poors (see below).  

Last year, multiples sky rocketed, a response to so much credit floating in the market, which allowed many fund managers to aggressively pursue deals.  This led to very high bussiness valuations as so much money was chasing each deal.  In 2008, the flurry of activity led to the most private equity deals done in one year and the greatest amount of capital invested in private companies.  Not news.  But what is interesting these days, is that the $1 Trillion of uninvested capital in the private equity market is poised to gush into the market soon enough.   

However, maybe not soon enough for some.  To get a better sense of the loss in value, the chart below shows the average market valuation multiple.  Obviously, we're wading through an aberration, but for business owners looking to raise equity capital, seeing the value their business cut by half, in some cases, simply because of seemingly external forces, is a difficult pill to swallow.

There are, however, financial structuring alternatives that can preserve the value that has been painstakingly established over time.  The reason for this is the flexibility offered in the private market.  In public deals there are regulatory issues, such as the 10% insider rule (requiring shareholder approvals) or warrant prices which must be fixed, which confine the possibilities of how to preserve and realize shareholder value.  In private deals, there is far more flexibility, which can likely overcome the majority of losses seen in the markets today.