by Scott Bushkie, CBI, M&AMI
I’ve met with many owners to talk about selling their businesses. Most go to market when the numbers make sense. But there are always those sellers who tell me, “I know the numbers are good, but I’m going to wait another year or so and build up my sales even more.”
Unfortunately, it’s not just financial performance that determines your company’s value. That value is also determined by economic factors completely out of your control.
As a business owner, you can’t impact market conditions. You have no influence over how much money is out there chasing deals, how many quality businesses are for sale at a particular time, interest rates, the lending environment, or the political climate/uncertainties. These are the kind of conditions that impact multiples.
A multiple is a guideline of what similar companies are selling for in the M&A marketplace, generally X times EBITDA (cash flow). In a recent IBBA survey, for example, we found that 73 percent of businesses valued between $5 million and $50 million sold for a multiple between 4.0 and 5.5 in the fourth quarter of 2013.
Let’s say you’re doing $15 million in revenues with a $2 million EBITDA. You’re an average to above-average company (you’re not the market leader, but the business isn’t distressed either) with some positive growth opportunities.
Now let’s say it’s a strong market and similar businesses in your industry are selling at a 5 multiple, for a $10 million value. But because you have growth plans, you wait a year and get to $18 million in sales with a $2.4 million EBITDA.
The only problem now is that some bubble burst or catastrophic event occurred in the interim (think the 9/11 attacks or the late 2008 financial crisis), and the multiples dropped.
Even though you’ve increased your top and bottom line by 20 percent, if the multiple drops to 3.5, the company is now worth $8.4 million. Even if the multiple only drops to a 4, that’s still $9.6 million or $400,000 less than what you would have gotten a year earlier.
Let me reiterate that multiples are just guidelines. Companies can trade above or below that number due to scalability, growth opportunities or buyer synergies (on the positive side), or customer concentration risks, declining industry trends or lack of a management team etc. (on the negative side).
The takeaway for business owners is that top and bottom line sales are not the sole indicators of value. Keep a pulse on the M&A market or work with an advisor who can do that for you.
As the saying goes, “The Rising Tide Lifts All Boats.”