Secret To The Ridiculous Multiple…it’s not high EBITDA

Author: Nick DeVaney

Let me tell you how we sold a company for 19x EBITDA in an industry historically selling at 4x – 6x.

Everyone knows that multiples are at or near all-time highs. Private Equity is aggressively looking to deploy capital, competing with Strategic acquirers who are taking advantage of bloated balance sheets and substantial growth opportunities from decreased competition and increased market potential. M&A activity is on the rise and not showing signs of slowing anytime soon. According to Mergermarket’s 2014 M&A Trend Report, 2014 ended with the third highest annual total dollars on record (since 2001), up 44.7% from 2013.

S&P Capital IQ data shows that lower middle-market transaction value in North America involving companies with $10 million to $250 million were up 33% from 2013 to 2014 and the San Francisco-based bizbuysell.com website predicted that the high transaction volume will only continue in 2015. Yes, it is absolutely a Seller’s market, but acquirers are still looking for the intangibles. “What makes them different? What make them so successful? What is beyond the EBITDA?” These are questions we hear every week from both financial and strategic buyers of lower middle-market clients we represent.

Why? Well, when these potential acquirers see better and more frequent opportunities, they begin to focus on standout opportunities because, although sellers still outnumber buyers, the options continue to increase. That means that, while the “average” company in market now is seeing record multiples, the companies that can demonstrate and articulate intangible value are commanding premiums. Only a few years ago when deals being done were fewer in number with less profitable companies in market, buyers with mandates (designed and committed plans) for acquisition, were tasked with fulfilling those mandates and injecting capital, wholly or partially, into acquisitions without the power of positive alternatives.

So here’s how we sold the company (no it wasn’t even in the Tech Industry) for a 19x EBITDA: intangibles. When a Buyer realizes and recognizes a Seller’s intangibles, the sky is the limit. Let’s be clear, value is determined by what the market is willing to pay. This means that value is no longer strictly determined by industry multiple trends, it is determined by your particular offering and what that particular offering means for potential acquirers. We not only understood this company but this industry inside and out. We knew what the competition looked like, what the market was doing, what acquirers were looking for, and why this company was positioned for explosive growth.

Again, multiples are in the Seller’s favor, statistics are in the Seller’s favor, and opportunities are in the Seller’s favor. But if you are looking to achieve a premium multiple for your life’s work, then you need to be able to articulate, replicate, and defend your intangibles. I challenge you to spend some time writing down what makes you different, what makes you better, what makes unique, and what makes you ready.

Three things to focus on while you look to potential value creation and/or exit:

1.Scalability
2.Repeatability
3.Defensibility

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