North American Middle Market M&A Update Q1 2018

Market Overview

M&A Valuations Reach New All-Time Highs

2017 was marked by positive underlying macroeconomic conditions continuing to bolster a resilient market and robust valuations. The overall economy continued to expand in 2017 as unemployment reached new lows, the stock market hit record highs and new tax cut legislation improved consumer confidence and corporate outlooks. Middle market enterprise value/EBITDA multiples increased to 8.7x in Q4 2017 – representing the highest levels seen in over 10 years, and significantly above the 10-year average of 7.5x.

Outlook for 2018 and Beyond

M&A momentum poised to continue into 2018

Given 2017’s strong M&A market and 34 consecutive quarters of positive GDP growth, a key question facing potential market participants is the duration of the current expansionary economic cycle. Key considerations include the newly enacted tax plan and rising interest rates. The tax plan stimulates an already healthy economy and puts more cash in the hands of corporations to deploy for acquisitions. In addition, investors remain mindful of recent interest rate hikes and will be closely monitoring the impact future increases could have on the cost of capital and subsequently, future returns. Despite recent economic stimulus and an overall positive sentiment for 2018, the longer-term outlook sees downside risk stemming from exogenous macro shocks, potential for mean reversion in risk appetite and inflation/rising interest rates becoming increasingly prominent. Business owners contemplating a sale should look to capitalize on the current favorable market conditions as eventually risk aversion and higher interest rates could impact the recent record high valuations.

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