You can practice some back of the napkin math to value a company, but it’s not always reliable. A company with $3 million in EBITDA, may, as a general rule of thumb, sell at a 4x to 6x multiple. In other words, it might sell for $12 million to $18 million in an average market.
If the company doesn’t have any outstanding qualities (i.e., no management team, lumpy sales, no recurring revenue), accepting an unsolicited offer in this value range could make sense. But if the business does have a number of value drivers, you’ll typically get better results on the open market.
Double the offer. Last year, for example, we represented a software company that had received an unsolicited offer from a company in their industry. Prior to our involvement, the strategic buyer offered a standard multiple of roughly 3.5x to 4x EBITDA.
The owners couldn’t envision who else would want to buy their company and figured they’d probably move forward with the deal. But as owners got into diligence, they began to feel uncomfortable and brought us into the process for guidance.
We demonstrated where the buyer’s offer was weak (they were undervaluing some of the profit, for example), and ran a competitive M&A process instead. Multiple buyers came to the table and the business sold for almost double the initial offer.
So why did the company value so far above standard benchmarks? As a software company with many long term customers, there was a certainty of future cash flows. Their customer base largely consisted of very sticky-stable government clients with no risk of customer default providing consistently high margins.
Plus, the owners were willing to stick around and manage the business post-transition, making it possible for a private equity firm or other non-strategic buyer to acquire the company. In all, several qualities in the business itself, plus certain conditions in the external market allowed us to position the company in a very attractive light, generating a value far above “normal” multiple expectations.
$10 million more. We’re representing a distribution company in a similar situation. Four years ago, this company would have been worth $6-8 million. But COVID-19 generated an uptick in profit that will likely have lasting benefits.
When the pandemic shutdowns first happened, the owners took drastic measures to cut expenses and trim unnecessary fat. Their EBITDA grew, and today the business would benchmark around $15 million under basic valuation guidelines.
Last summer, the owners reached out to an industry peer to discuss a possible sale in that $15 million range. After consideration, the buyer passed.
The sellers reached out to us next, and we ran a competitive auction-like process without naming a starting price. By optimally framing the company’s long-term stability, its growth opportunities, and the owner’s willingness to transition the business, multiple buyers submitted offers between $23-$26 million.
Check before you accept. By definition not every company is worth more than the average. If you get an unsolicited offer, get a second opinion before you accept. Ideally, you would talk to an M&A firm that’s represented businesses of your size.
If it’s a reputable firm and they see it’s a good offer, they’ll tell you. Sometimes unsolicited offers can make the most sense for buyer and seller. But don’t let a buyer pressure you into moving too fast. Give yourself time to get more information.
Know your business’s value. Pulling a multiple on EBITDA is the most simplistic form of doing a valuation. But it doesn’t tell the whole story. It doesn’t account for standout business qualities that drive up value, and it doesn’t account for current market dynamics.
If you own a business, it’s a good idea to get an estimate of value every few years. Knowing what your business is worth (and what’s behind that value), can help inform your growth plans. Alternately, you may also find the business is worth more than you expected – and accelerate your exit plans.