Ep #6: Exploring the Nuances of M&A Deal Valuation

Unlock the enigma of company valuation with us, Russell Cohen and my co-host Jeremy Wolf, as we dissect a mammoth $100 million M&A deal. Ever wondered what really drives the price tag of a business? We're peeling back the layers of EBITDA, uncovering how this financial cornerstone influences a company's market value and why the multiples of EBITDA are the heartbeat of negotiations, particularly when private equity groups enter the fray.

Journey through the labyrinth of valuation methods with us; from assets to income to market comparisons, we illuminate each path. Our conversation ventures into the territory of platform investments and add-on acquisitions, decoding how these classifications can make or break the deal. Whether you're a business mogul or an aficionado of high-stakes finance, our exploration through the valuation landscape, complemented by real-world examples, offers a wealth of understanding. Tune in and equip yourself with the wisdom to navigate the complex world of M&A valuations.

Transcript

Speaker 1: 0:01

Welcome to the South Florida M&A Advisors podcast, your trusted M&A team. Here's your host, Russell Cohen.

Speaker 2: 0:13

Hello everyone and welcome back to the South Florida M&A Advisors podcast. I'm your co-host, jeremy Wolf, joined by your host, russell Cohen. Russell, how you doing today? All right, doing great, all right. So we've been talking and going through this recent deal that you had $100 million deal and going through the different topics or different components of the deal and curious about valuation. Right, somebody out there here is $100 million deal. How do you land on a value of a company? What goes into that? Can you, I guess, dissect that and talk about how the valuation process works in the context of a large-scale M&A deal?

Speaker 3: 0:49

So if you are working with private equity groups, your valuation will be based on a multiple of EBITDA earnings before interest, taxes, depreciation and amortization. It's a counting term. You can look up on Google and all that good stuff.

Speaker 2: 1:05

What is the multiple? Is it a standard amount? Is it different per type of business You're going to be?

Speaker 3: 1:11

classed as either a platform investment by the private equity group or an add-on acquisition. So let's work our way north. If our private equity group comes in and says we're in the space already, we have an existing platform, let's use the roofing. We made that first investment and now we're looking to add on to our platform investment. That is very common in today's world, and so what happens is they already made the big investment and now they're just adding to their platform to build out the whole platform. So you got your platform and then you got your add-on acquisition and so it's based on a multiple of EBITDA, and so typically we're going to see between, let's say, four to five, maybe five and a half, just depending on the economy.

Speaker 3: 2:08

The economy does affect it too. If you go into a recession or a major recession, the multiples will go down. On a great economy, the multiples will go up. So you got to first define what are you to the private equity group. If you're an add-on acquisition, you're not going to get the eight to 10 multiple because they already made that investment in a platform. So, for example, this roofing company that we just recently sold, this was the first investment for this private equity group, and so they made this roofing company the platform investment.

Speaker 3: 2:46

This particular company had an EBITDA of $13.5 million. They paid $100 million, so you're probably looking at a 7.5 multiple. So to be considered a platform investment for these private equity groups, you have to have the higher level EBITDAs $5 million, $7 million, $10 million, $15 million. When a private equity group is launching their platform, they're looking for those larger EBITDAs to give the better multiples. If you're sitting $1 million, $2 million, $3 million, you're not going to get those same multiples. And I'm not talking about technology business, I'm talking about your contractors, your distribution, manufacturing companies. So it just all depends where you are in your EBITDA. So if you have aspirations of a higher multiple, then you got to grow the business more Basically that's really what it comes down to.

Speaker 2: 3:47

So can you explain the differences between asset-based, income-based and market-based valuation methods?

Speaker 3: 3:59

Okay, very good, I'll give it a shot at it. I don't know the exact definitions. I guess the asset base is looking at the assets that you have and putting a valuation on it based on the asset value. Market base, where you're going out and seeing what the market multiples are, and then income base is based on a multiple of EBITDA. So there's a couple different valuation methods and obviously a certified business appraiser. If you decide that you want your business valued by a certified business appraiser, then that's the best way to know what the business is worth.

Speaker 3: 4:47

For that point in time You're a business valuation. Let's say, if you did it for the beginning of a calendar year and they go back three years, it's only valid for that point in time. And if you have an off year on the following year, if we're talking, let's say, 24, six months, in nine months in, your numbers are down well, that valuation that you did on 23, 22, and 21 is changed. So business valuation can change significantly really quickly if you're not maintaining the business or growing the business. So be very careful. You know when your business valuations do change really quickly. So maintaining numbers is vital.

Speaker 3: 5:29

As an advisor to keep the integrity of the price. I always tell the seller keep the gas on the pedal while we're going through this process, because they are looking for your financials 30 days up the closing. They want to make sure that you're not falling asleep at the wheel while this process is going on, because that's what they're walking into. They're working into that future workflow. They don't want the seller well, they're cashing out and trying to cash out as much as possible and they just you know they're ready to go on vacation. No, this is. Your journey with the private equity group has just begun.

Speaker 2: 6:08

So what are some challenges or obstacles that you've encountered when it comes to valuation? Because I'd imagine obviously there's two sides to this. The seller wants to get the most for the business, the buyer wants to get the best deal. There's obviously some conflict there. What are some struggles or challenges that you faced and how have you overcome that as the advisor?

Speaker 3: 6:26

You know, a lot of times people hear from other people maybe they're CPA or friend and so for multiple of sales and they're really not getting the right information and that's why we try to direct them to a certified appraisal. Basically, when we bring a business out to the to actually be marketed to a set approved buyer list, we actually don't put a price on the business. We come out, we put the SIM together, put the teaser together, we organize the engagement and we don't come out with a price. We're trying to create an environment where let the buyer, let us know what it's worth.

Speaker 3: 7:12

Now, for example, I'm selling a fire protection company and you know seller had in his mind six and a half, seven million let's, for example, and, and I thought you know, eight was a great number that the seller would accept. We ended up getting nine, which was great, and that's the beauty because we didn't put a price on it. And so that's what happens you put a price and they put a multiple EBITDA and you don't know what, what the buyer is thinking, because they're thinking four and five times EBITDA and so yeah, so the. So sometimes you meet and exceed the seller's expectations because you're not setting a price and you let the, let the marketplace determine the price.

Speaker 2: 7:58

That makes sense. I have a question for you, russell. Do you exclusively handle privately held companies, or have you ever done a transaction involving a publicly held company?

Speaker 3: 8:08

I only handle privately held companies.

Speaker 3: 8:11

I was involved in a M&A transaction where a publicly traded company bought an internet company and so that was challenging in itself because we had to go. You know, it's a little more regulated when you're dealing with a publicly traded company, so that was great experience and very professional, had really great experience, great professional people to deal with and and they, you know, and obviously with a, you know they're buying at a multiple, let's say three to five, and then you know they're trading at 22 times multiple. So so they want to buy those companies because they, you know, they try and try to drive up the stock price and and if they can bring in a huge EBITDA at a low multiple and you know it just multiplies itself out crazy. So so, yeah, different multiples with publicly traded companies versus, you know, if you're selling a main street business versus if you're selling businesses in the private equity, mergers and acquisitions the multiples keep going up and up and up until you get to the publicly traded company where the mutuals are. You know, hard to believe right?

Speaker 2: 9:19

Yeah, well, I was interested in how the valuation works between from private to publicly held companies. It just seems like we thought the privately held transactions were complicated enough. You know, you get into these publicly held, just it's just more, more people involved with the process, more. You know, yeah, a lot of times they like to throw in the stock.

Speaker 3: 9:37

You know you get a chunk of money and then they're offering you stock and they want you to keep on. You know, stay on and help run the company. It's very hard to exit the company quickly. They're going to want you to stay on one to two years, even in with a publicly traded company. They don't want to. They don't want to run your business. They need people to run the business. You know.

Speaker 2: 9:57

Yep, yep, all right, I anything else from this? I'm sure this is a deep topic. We could probably talk about this for for hours upon end, but is there anything else you wanted to touch upon?

Speaker 3: 10:07

Yeah, I mean, once again, if you're unsure about the value about your business, get it appraised. And an appraisal, a basic calculation of value report, could run, you know, three, three grand, let's say minimum. Let's say, and you know, even though you trust your CPA, if your CPA is a certified business appraiser, then he or she can give you a valuation on your business. If they don't have those credentials, then it is as good as my broker. Opinion of value. Basically.

Speaker 2: 10:39

All right. So for anyone out there listening that's owns a business looking to sell, get in touch with some professionals, reach out, learn more about how. And Russell helps clients that he works with through M&A South Florida M&A advisors Russell always a pleasure. Thank you All right. Everyone thanks for tuning in and we will catch you next time. Take care.

Speaker 1: 11:03

Thanks for listening to the South Florida M&A advisors podcast. For more information, visit South Florida MAcom or contact 954-646-7651.