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Sell-Side M&A Advice: The Elusive EBITDA Multiple in Private Company Valuations

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Once you have an EBITDA clear in your mind, what should you expect as a multiple to be applied to that EBITDA?  This is the great question with which all Buyers and Sellers struggle.   And there is no single exact number that can be calculated.  Rather, what is negotiated ultimately determines the fair market value of your business and the price at which you will sell your business.

In general, private companies sell between 2X and 10X EBITDA, with the majority of transactions in the 4X to 6X range.  Therefore, a company with annual EBITDA of $1MM is generally worth between $2MM and $10MM.  There are, of course, outliers where companies are worth more or less than this range.

Okay, but this is a very wide range.  How do we narrow this analysis?  As a Seller, you will want to prove the existence of one or more factors that drive the multiple upward, hopefully even higher than the high end of the normal range.

Public Company Comparables.  As a Seller, if you can find comparable public companies, their EBITDA multiples will set likely the high-water mark for valuing your company.  The reality is that Buyers will argue that public companies are not true comparables, given they are usually larger, much more liquid, and far more transparent and regulated than private companies.  But it’s always good to know the high-water mark.

Private Company Comparables.  First, what are “comparables”?  In the M&A world, these are businesses or companies that are similar to the business being sold.  There is never an identical company, so the relevance of the comparable company is increased the more it is similar to the business being sold in terms of type of business, business model, size, location, profitability, and any other material features of the business.  This is very hard information to find, but well worth the effort.  Talk to everyone you can in your industry (e.g., operators, owners, accounting firms, lawyers, business valuation firms, trade journals) and probe deeply in the online world for supporting data.

Historical and Projected Growth.  This is the big one! If you can prove the case for sustainable annual growth in revenue and profits of over 10%, and ideally over 20%, you are well on your way to a high multiple.  This case, of course, is bolstered by proven similar growth in the past several years.

Recurring Revenue.  As a Seller, if your revenue is of a recurring nature, meaning it is largely in place from prior years and can be expected to continue without a huge sales effort or high degree of risk, you can argue a strong case for a higher multiple.  Look for ways to prove out high customer retention rates that, of course, delivers that recurring revenue.

Unique Product or Service.  The more commodity-like the product or service is, the more likely potential buyers will say, “Why buy a business?  I’ll just start one.”  Which will, of course, lower your pool of potential buyers and, hence, the price of your business.  In Silicon Valley, companies talk about their “intellectual property” or “IP,” which can be anything from highly unique knowledge or skills to patented products.  IP is thought to be a proprietary and protected form of revenue and profit, and hence more valuable than a commodity.  As a Seller, you should work on how to portray your company as having more IP and being less of a commodity. If you had, for example, a pet services company, you may make the case that your systems, which include an online reservation system, an online or app-based progress report so that customers can track the progress of their pet’s session, videography of the services provided, and delivery of a digital report card to customers, constitute proprietary IP not easily replicated

Non-Professional Services Provider.  The issue with professional services firms is that the value of their businesses (i.e., their people) walks out the door each night.  Given the flight risk of the core value of the business, no one wants to pay too much for the business in which they operate.  This is why law and accounting firms do not trade at high multiples.  In fact, they usually trade at the bottom of the normal range.  An example, though, of where a services firm could trade at a higher multiple is where it possesses a unique skill and market position that would be hard to replicate.  Several years ago, we ran across a law firm that was known throughout California as the best firm to procure temporary work visas.  Their reputation, and processes and procedures, allowed them to price their firm well into the normal multiple range, instead of well below it where a local general law firm would likely trade.

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David Traversi, Partner, Newport (david.traversi@newportllc.com)

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