When speaking with acquirers I often ask, “how did you determine the purchase price?” Answers range from “that’s what the seller was asking” to complex valuation models and analysis.
I see a lot of M&A transactions. More often than you might think, I come across very similar deals with very different valuations. For example, two acquirers can be looking at manufacturing companies with nearly identical financials and business models but one buyer is valuing a target at 10 times the other. How is it that two nearly identical companies can have extremely different valuations?
Sometimes the higher valuation is derived from the value of future synergies or growth potential but more often the higher valuation is a result of an underqualified buyer.
In previous posts, I have discussed how to properly value acquisitions with a focus on smaller M&A transactions. For those of you working on larger acquisitions (or looking for more detail), I want to share the Pepperdine University Private Capital Markets Project.
“The Pepperdine private cost of capital (PCOC) survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in January 2016, specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, business brokers, limited partners, and business appraisers.”
While the 2016 report has a lot of great information, the parts I find most interesting are the sections where industry professionals are surveyed about valuation. Private equity firms and public companies usually acquire private companies and do so with the help of investment bankers, lenders, business brokers, and others, all of whom were surveyed.
So, according to the dealmakers of 2016, where do M&A valuations come from?
Well, investment bankers say the average EBITDA multiple for companies with $1MM to $4.9 MM in EBITDA is 5.3X,
adjusted EBITDA is the preferred multiple for private equity buyers when valuing targets,
and revenue multiple is the preferred multiple valuation method of venture capitalists.
That’s just a quick glimpse of the treasure trove of information included in the 125-page report. With all kinds of great information for companies growing through M&A or raising capital, I suggest most of my readers check it out.
You can download the full report HERE.
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.
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