Dealtracker shows SME reluctance to sell and higher earnings multiples for small targets

Small-to-medium enterprises (SMEs) continue to be the engine room of Australian deal volumes, but recently their owners have been more reluctant to sell and have achieved higher earnings multiples in their valuations than before.

This is one highlight from the latest 18-month Dealtracker prepared by advisory group Grant Thornton Australia, which showed SMEs (with transaction values below $100 million) accounted for 77 per cent of deals that were disclosed in the period to June 30 this year, down one percentage point on the previous report.

However, when also accounting for deals that were not disclosed, SMEs made up 32 per cent of the volume.

"Examples of SME deals completed during the period included FetchTV Content Pty, Essential Assessment Pty Ltd and Chargefox Pty Ltd, where local and international listed corporates bid strongly for specific strategic benefits of these assets," the authors wrote.

"We have observed a greater reluctance from SME business owners selling their businesses as volumes decreased by 13 per cent, whereas other disclosed deals have reduced by 8 per cent," the report stated.

"In light of current economic uncertainty, tightening interest rates and cost of living pressures, business owners are choosing to postpone the sale of their assets until the economic conditions return to a more stabilised level."

The median trailing EBITDA for businesses with less than $20 million in revenue was on a 7.2x multiple, compared to a long-term average of 6x and a previous level of 5.3x in the prior report.

"We note that there are significantly fewer transactions observed of this size in the current Dealtracker report compared with the prior report," the report clarifies.

"Median trading multiple for companies in the revenue range of $20m to $50m was 8.7x for the period, which is higher than the historical Dealtracker long-term average of 7.3x."

US multinational Arthur J. Gallagher & Co accounted for the highest number of deals at 11, while highly acquisitive Australian corporates included DGL Group (ASX: DGL), Honan Insurance, Software Combined, Apiam Animal Health (ASX: AHX), Healthia (ASX: HLA), MA Financial Group (ASX: MAF) and nib (ASX: NHF).

Of the 10 largest deals, only three took place in the first half of 2023, including Perpetual's (ASX: PPT) $2.5 billion acquisition of Pendal, Woodside's (ASX: WDG) purchase of BHP's (ASX: BHP) petroleum business, and Forrest family-affiliated Squadron Energy's buyout of CWP Renewables.

The report's authors highlighted a return in interest towards the industrials sector, accounting for 31 per cent of total deal flow with 523 deals. Meanwhile, the consumer discretionary sector demonstrated growth of 16 per cent to 256 per cent.

"This increase indicates that the broad shift in consumer behaviour, fuelled by economic uncertainties has surprisingly not resulted in a deterioration in deal volume," Grant Thornton stated.

"However, if economic conditions worsen, we expect a decrease in future deal volumes."

The IT sector was the leading source of deal flow in the previous report at 28 per cent, but dropped by eight percentage points to 20 per cent for in the recent period with 348 deals.

"Deal growth in the IT sector has decelerated and returned to a secondary position to the Industrials sector as acquirers are looking for more defensible assets in times of economic turmoil," Grant Thornton said.

The pivot to the Industrials sector is reflective of the Government’s investment in sovereign capabilities over the past three years to encourage activity in the sector.

"The Industrials sector has successfully recaptured investors’ attention, due to an increased focus on supply chain security for Australian businesses”, said Grant Thornton Australia corporate finance partner Jannaya James.

"While the importance of innovation through the adoption of new technology remains, we have seen a resurgence in deals in industrial services driven by Government investment in local manufacturing in an effort to improve supply chain resilience."