Business owners frequently ask themselves, “What’s my business worth?” The short answer: it depends on who’s buying.
Strategic buyers and financial buyers will often value the same business differently, a situation driven in part by synergies and hurdle rates (the buyer’s required rate of return on acquisitions).
One report recently analyzed the selling price of manufacturing businesses purchased by private equity firms, which can help owners peg the potential value of their business.
Here’s the good news: multiples are up. And the bigger the business, the higher the multiple.
According to the report, businesses generating EBITDA — which are earnings before interest, tax and depreciation — in the range of $1.5 million to $4 million were sold for $10 million to $25 million. That’s an average EBITDA multiple of 5.8 times and about 1 times revenues.
Businesses with EBITDA of $4 million to $8 million supported an average multiple of 6.2 times, selling between $25 million to $50 million.
The average EBITDA multiple for sales in the range of $50 million to $100 million was 7.3 times. And for those in the range of $100 million to $250 million, the multiple rose to 7.7 times.
Add-on transactions, where the buyer is adding the acquisition to a business in its portfolio, boasted a slight 5 percent to 10 percent premium, driving the EBITDA multiple in a $25 million to $50 million transaction to 6.5 times.
It should be noted that these implied EBITDA multiples are averages, across hundreds of transactions. The appropriate multiple for any business will only be determined through a competitive sales process. But the averages are useful data points.
Since 2013, the value of manufacturing businesses, based on implied EBITDA multiples, has trended upward by about 20 percent. So, what’s fueling these higher implied EBITDA multiples?
One major contributor is the current economic expansion, one of the longest in U.S. history. Unemployment just fell below 4 percent — the first time since 2000.
Another factor is the ability of financial buyers to rely on more debt to finance the purchase. In 2013, the average debt load (total debt / EBITDA) was 3.4 times. Today, those debt loads are 25 percent higher, averaging 4.2 times EBITDA.
Higher debt loads help buyers meet their required rates of return, with debt being cheaper than equity to fund acquisitions.
And finally, the recent tax changes are also helpful, increasing the value of a business by up to 20 percent, all else being equal, as the future cash flows of the business are taxed at lower rates.
Looking back over the last 15 years, manufacturing businesses have never been valued at higher implied EBITDA multiples. But that’s doesn’t necessarily mean it’s the best time to sell.
Sometimes an owner wants to sell, but the business is not ready to be sold. The decision to start a sales process should not be taken lightly. Oftentimes, it takes six to nine months to close. This amounts to a marathon, not a sprint.
It’s also important to spend time upfront to identify (and eliminate) all potential surprises before you start the process. Run your own due diligence, as a buyer would. Surprises can quickly derail a promising process.
John Heffernan is a managing director at Exvere.