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THE CONFUSION ABOUT MULTIPLES

Even those of us imbedded in the M&A world are sometimes confused by multiples paid. While each deal is unique, buyers and sellers continue to seek clarity about the most reasonable multiple for their deals. What causes this disconnect?

To determine the multiple for a private company transaction is difficult, at best. Here are the issues:

  1. The multiple is applied to adjusted EBITDA to calculate a purchase price. If we know the ultimate price and EBITDA, we can compute the multiple. Here are some of the factors which complicate a ready calculation:
    • the buyer intentionally obfuscates the actual price
    • the real EBITDA is never known or revealed
    • the purchase consists of part cash, part earnout. What value is assigned to the earnout?
    • the seller rolls over equity so the price paid is misleading
    • the seller income does not support a going concern, which results in an asset sale
    • the assets are acquired out of bankruptcy
  2. For our sell-side clients, one of our primary requirements at the outset is to reach an agreement, on at least a minimum price they will accept. Usually, the value is gauged by our estimating a multiple range and the client telling us what they expect to show as a trailing 12 months or year-end EBITDA.
  3. Size matters. Larger revenue firms demand higher multiple brackets.Other mitigating factors are:
    • industry and industry niche
    • IP advantages
    • size of EBITDA
    • synergies of the deal
    • growth expectations
    • industry leader (top 3)
    • customer concentration
    • restrictive government regulations

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