Buyer and seller price expectation gap is closing

Despite the continued slow growth in the UK economy, the multiples being paid for private companies for sale rose in the second quarter, suggesting stability within the market for trade purchases.

The latest BDO Private Company Price Index (PCPI) found that the price to earnings multiples increased from 9.0 per cent in the first quarter of the year to 10.8 per cent in the second quarter. It must be stressed that these multiples apply to larger private companies with annual revenues between £10m and £50m.

The rising values came despite the fact that the volume of deals actually fell by 11.5 per cent to 317 deals, down from 419 three months earlier.

Analysis of the trade deal volumes over the past year show that the number of deals being completed has risen when the PCPI falls. For example, there were 330 deals completed in the last three months of 2010 when the index hit 12.0, while 419 deals were completed in the first quarter of this year when the index stood at a more modest 9.0. This could be due to a larger appetite for purchases when businesses are priced more fairly, demonstrating price elasticity in a lacklustre economic period.

The figures from the past year also suggest that when the index shows prices are stable at a certain level - such as Q4 2010 and Q2 2011, when it stood at 10.7 and 10.8 respectively - the deal volumes were almost identical. BDO claims this demonstrates that there are a stable number of buyers when prices are constant.

Perhaps the most interesting conclusion to draw from this most recent PCPI report is that the number of trade deals for mid-market businesses are on the increase. This implies that the expectation gap between what sellers are hoping to receive for their businesses for sale and what buyers are looking to pay is closing.

Following years of overpricing in the run-up to the economic collapse, the mid-market seems to be falling into a pattern where multiples paid are more in line with seller and buyer expectations.

BDO mergers and acquisitions partner, Christopher Clark, stated that the figures could have a significant effect on the price expectations from both buyers and sellers. He stated, "With stabilising deal volumes and lower volatility in pricing, the scene is set for the continued reduction in the price expectation gap between buyers and sellers."

Although the UK economy is expected to remain weak in the coming months - as spending cuts and VAT increases continue to hit consumers hard - trade and private equity deals are proving resilient. Certain sectors, such as manufacturing, are performing particularly well.

Business owners are struggling to generate organic growth in the current financial climate and are relying instead on acquisitions as a growth strategy, which is great news for sellers – particularly in the under £50 million category. With the PCPI standing at a reasonably high, but fair, 10.8, now could be a good time for those selling businesses to get the price they expect, and buyers to pay a price they are happy with.

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