We talk alot about Multiples of Revenue & EBITDA when it comes to an M&A deal. In this episode we are unpacking how we use them, why they are important, and how buyers & sellers can align when it comes to deal multiples.
- What is a multiple?
- Why are multiples used in M&A deals?
- How is a multiple calculated? Does it include items like cash harvest or employee agreements?
- Based on different categories, different sub-industries in tech-enabled services will warrant different multiple ranges. What are some of those categories and ranges? For example: Staffing companies, resellers, custom app dev, CSPs, MSPs, cybersecurity, generative AI
- How do other items, like size, geography, vertical market concentration in clients, impact a multiple? How do non-financial factors like culture impact a multiple?
- How do Revenue and EBITDA multiples interact? We’ve seen firms with high profit margins result in deals that are 2-3X revenue.
- If someone hears a multiple, it feels like they hear either the highest number if they are trying to sell or the lowest if they are trying to buy. How do you explain the nuances to a buyer or seller?
- If multiples are more of a gut check on the proper ranges of a deal, how often are M&A enterprise values tied directly to a multiple of EBITDA?
- How important is it to get the proper deal comparisons if multiples become a method of comparing two firms?
- If a deal is based on a multiple of EBITDA, how do buyers and sellers agree what is in or out of adjusted EBTIDA?
- What are examples of firms that traded well outside of an industry norm for a multiple?
EPISODE SUMMARY:
- Multiples, such as a multiple of EBITDA, are commonly used in M&A deals as a simple way to gauge the value of a company. However, they are not the sole determinant of a company's valuation.
- Adjustments to EBITDA, known as "add backs", can be made to account for one-time expenses or other factors that will not continue post-transaction. The agreed-upon adjusted EBITDA is a critical factor in determining the multiple.
- Many factors beyond just the EBITDA multiple impact the final enterprise value in a deal, including strategic fit, cultural fit, and buyer synergies. The multiple is more of a planning tool than a definitive valuation.
- Higher profitability tends to correlate with higher multiples, while lower profitability may not support a revenue multiple above 1x. Finding truly comparable companies can be challenging.
- Deals sometimes trade outside of typical multiple ranges due to strong strategic fit or other unique factors, highlighting that multiples are not the only consideration in valuation.
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