Acquisition Multiples

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February 23, 2020

by a searcher in Florida, USA

What is the classic valuation technique in search funds? I am thinking EBITDA multiples. I have heard multiples as low as 2-3x EBITDA. Is this accurate???

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commentor profile
Reply by an intermediary
from State University of New York at Stony Brook in Boynton Beach, FL, USA
Unless you know the industry and the specific key performance indicators for the company, the suggestions of which multiples to use is meaningless advice. A multiple is the outcome of an analysis of the earnings power of a specific business. Without an analysis, a multiple or even a range of multiples is just a guess and likely incorrect. A common methodology for valuing a small business is to use the Direct Market Data Method, which is one of the income approaches to valuations. This method uses the prior sales of similar businesses to determine the Most Probable Sales Price of the target business. That sales price is adjusted up or down based upon the comparison of the target business with the statistically relevant sold pricing data. This method determines the value based on historical trends. If a buyer wants to determine the value to the buying entity, Discounted Cash Flow method can be used. This method considers the forward going earning power based upon strategic, synergistic or other factors specific to the buyer. Each of these income approach method produces an estimated value, from which a multiple of SDE or EBITDA can be imputed. Not the other way around. Certified Business Intermediaries of the IBBA are well qualified to perform such an analysis.
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Reply by a searcher
from The University of Chicago in Dallas, TX, USA
A price is where a buyer and seller agree to transact - it will change depending on literally dozens of factors.

Are you the only bidder, multiple bidders?

Is the business on an upswing or steady or declining?

Industry...

EBITDA levels...

Ability for the business to support leverage....

What a buyer can do to the business with high level of confidence - consolidate overhead, add customers, apply technology etc - This is the buyers alpha, but they might be willing to pay more than another buyer who does not have these items in their back pocket...

I could keep going...
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