Looking for 3X EBITDA? Why?

Most buyers would be happy to pay 3x EBITDA for a decent business.  I will not go into the details of what a decent business is but sufficed to say this is generally the rule. However I recently took an interest in a small service business and spend some time at the facility.  The owner and the broker are looking for 3x EBITDA and are willing to finance 50% of the deal.  Pretty good right?  Well not so fast.

The owner is the business and quite frankly its short staffed.  In other words he has been running the place on the low-down.  He can’t go out and chase new business because he answers the phone – along with an assistant and his wife.  The issue I have is that the new owner will need to hit the street and sell – however it would entail finding a new inside sales rep to replace the owner.  So the business EBITDA is $200,000 and the new addition costs $50,000 – its starts to make the 3x look like 4x EBITDA.  And oh yeah his wife is not on the payroll.

A couple of additional thoughts.  If the seller had someone on staff that was not conpetent – that person could have been replaced and dollars exchanged – no such luck here.  And secondly – if I go out and sell then I should be able to generate additional revenue – fine but I rather be conservative and dult note it takes time to build new revenue.  What did I end up doing – see my next post.

 

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One Response to Looking for 3X EBITDA? Why?

  1. EMHpe says:

    Excellent points! It’s because the go forward EBITDA will be much more different than the trailing EBITDA if you plan on scaling up the business and basically not run it on the cheap. You would be trying to generate commercial goodwill going forward with systems, process, etc. that would cost money, which is something that the current owner has not done. Thanks for the article.

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