Blue Skies for Small Business M&A?

Speaking with a couple of contacts lately and wanted to share some of the buzz I am hearing.  Undoubtedly companies are selling however acquisition multiples are bifurcated.  The fact is that companies with EBITDA greater than $4 to $5mm with a great growth story and demonstrated earnings throughout the downturn will command higher multiples.  And of course weaker entities much less – maybe by a factor of two.

But  in keeping with the gist of the blog – what are the multiples?  I will give you the usual caveats – it depends on the industry, management, revenue trends, gross profit margins, blah, blah, blah.  Companies that have strong growth potential and substance can expect 5x to 9x EBITDA.  In fact I was informed that leverage is creeping back into the  marketplace.  Add that to the fact that private equity is sitting on quite a bit of cash.  And it makes sense.

The lower end of the market will still generally command a multiple of EBITDA of 2.5x to 4.5x.  In fact I was called by a broker telling me of a new listing: $1.5mm in revenue and $300,000 of EBITDA.  The broker was asking for 2.5x EBITDA.  No real growth but steady cash flow.  Lower multiples clearly reflective of a tougher financing environment combined with uncertainty in the macro-environment.

Finally, buyers will need more cash than the past.  Deals used to get done with 20% to 40% down.  The current environment is one in which buyers are looking at 50% of the purchase price in cash.  So as cash – financing and the economy press on valuation for the lower end of m&a —- the larger deals seem to have buyers with both cash and financing potential.  For the right company that is.

If you have had recent experiences in terms of valuation and financings – please feel free to share your experience.

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2 Responses to Blue Skies for Small Business M&A?

  1. Mike says:

    I am in a position to possibly by out a competitor. We are a NE-USA company, our competitor is in one of our territories where we are pretty strong staff-wise. (We are in the service industry, so our employees are our most important asset.) The competitors entire company is located in this small region, and we could take over their cliets very easily. One thing that through me off was when he told me “3-years EBITDA.” Does that mean the same as 3x?

    • donsrons says:

      Yes – thats what it means. Now its time to discuss structure ie. earnout – note – etc tec – let us know how it turns out.

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