How Do You Value Small Acquisition Targets?

How Do You Value Small Acquisition Targets?

So you decided to acquire a small business. That’s great! Buying a small business (less than $500k in EBITDA) can be an excellent way to start an M&A program, add tangible financials to a new business, build a customers base, and more.  While there are plenty of benefits to acquiring a small business, there are also a number of risks. One of the largest risks is overpaying. Acquirers often find themselves asking – How do you value small acquisition targets?

When valuing a small business, comps are usually hard to come by. Public companies, “blockbuster” deals, and industry statistics usually don’t correlate to (very) small business valuations.

For example, large public companies usually trade at an P/E ratio of 10+ and private acquisitions usually price at 4-9X EBITDA. According to the Pepperdine University 2015 Capital Markets Report, the average purchase price for a company with $1 million in EBITDA was 4.5x while deals with over $50 million EBITDA were purchased for over 8x EBITDA. The study also looked at how sector plays into valuation (see image below) but, they don’t have very strong stats on deals that do under $500 thousand in EBITDA.

 

ebitda multiples
Pepperdine University 2015 Capital Markets Report

While traditional metrics don’t really apply to small M&A transactions and most traditional sources don’t track small deals, BizBuySell.com‘s quarterly survey has some very helpful insights.

In their Q1 2016 Insights Report, BizBuySell.com “aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide”. In Q1 they tracked 1,840 transactions with median revenue of $478,000 and median cash flow of $110,000. The average multiple of cash flow on those 1,840 small business transactions was less than 2.5x cash flows, a substantial drop from the 4.5 average for $1 million businesses.

2016Q1_Small_Business_Sale_Price_Multiples
From BizBuySell’s First Quarter 2016 Insight Report

So next time a seller (or business broker) tries to compare their sub $1MM EBITDA business to that deal you just read about in the WSJ or that high flying large cap, feel free to bring them back to reality. Maybe ask them -How do you value small acquisition targets? Remember, it’s important to negotiate a deal that is fair for all parties involved, not just the seller.

Do you have any tips or advice for valuing small businesses? Please feel free to share and comment.


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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2 thoughts on “How Do You Value Small Acquisition Targets?

  1. Pingback: Where Do M&A Valuations Come From? – B. M. K.

  2. Pingback: HIGH Cannabis Company Valuations. – B. M. K.

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