Business owners frequently ask, “What EBITDA multiple are companies selling for these days?” Such a question presupposes that there is a standard multiple of “earnings before interest, taxes, depreciation and amortization” that is applied to all businesses. This is incorrect on multiple counts: 1) the bands of EBITDA multiples vary greatly between industries, 2) within any industry, an individual company’s EBITDA multiple will vary based on its specific circumstances, 3) some companies in fast-growing industries trade for multiples of revenue, not EBITDA, 4) some companies in current asset-intensive or distressed industries trade based on their book or liquidation values and 5) the needs of a strategic acquirer can trump all other factors.
* Industry EBITDA Multiples: Companies in out-of-favor industries trade for conservative M&A EBITDA multiples. On the other hand, companies in “hot” industries trade for robust M&A multiples. To paraphrase George Orwell’s Animal Farm, “All industries’ EBITDAs are equal, but some industries’ EBITDAs are more equal than others for M&A valuation purposes.”
* EBITDA Variations within an Industry: Companies within an industry will typically trade within an M&A band. Factors that increase a company’s position in that band are (a) the proprietary or specialty nature of its products, (b) its sales and profit growth, (c) the recurring nature of its sales, (d) the quality of its management and labor force and (e) the condition of its plant. I sold a roll-former for a high EBITDA multiple because it had military, medical, construction, marine and material handling customers. A competing roll-former was unsaleable because its customers were all automotive.
* Multiples of Sales: Scalable technology companies in fast-growing industries are so desired that they trade for multiples of revenue. To maintain perspective, realize that their owners generally have made large up-front investments.
* Valuations Based on the Balance Sheet: I negotiated against a New York buyer who pontificated, “We don’t put any value on assets, only EBITDA.” I asked, “Then why does the Treasury guard the gold in Fort Knox?” We ended up liquidating my client’s excess assets for their book value and then selling the remaining business for a healthy EBITDA multiple to somebody else.
* Strategic Acquirers: The “Holy Grail” of M&A is to find strategic buyers willing to share the synergy value they hope to realize. These buyers do not want a “diversified company.” Rather, they seek a business that is excellent at one specific thing that they can multiply in their larger organization. For example, a software company CEO told me that the price paid for a new app is irrelevant as long as it fortifies his product suite.
In The Seven Habits of Highly Effective People, Dr. Stephen Covey says that one should “begin with the end in mind.” This applies to M&A as managers should recognize how acquisitions are valued and then develop their companies to maximize price along these lines. Then, when it is time to sell, their companies will better “fit” what acquirers are willing to pay.
Mark A. Filippell is managing director at Citizens Capital Markets
