Having trouble agreeing on a sales price. Business has been under current ownership for almost 10 years. First 9 there was no profit, year 10 the business is profitable. Seller feels ebitda based on last 3 years should be 5X. Anyone with experience here weigh in? Owner is also still hands on. Thanks. Pretty new to this.
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Business broker here.
There isn’t enough information to offer meaningful advice. Some opportunities like this can be a gold mine. Others should be avoided.
Dependent on industry, if owner is a key man and departing, it’s hard to get 5x in most industries.
The price is what the market is willing to pay. How long are you willing to wait to get your money back?
What the seller. Wants should be pretty irrelevant to you.
You aren’t buying stress free income generation here, you will have to work at it. So If it was me I would be looking at 2-4 years ebit.
What I do afterwards to improve the position of the company is none of the sellers concern. If they were able to do it then it would be done.
Don’t let them guilt you into overpaying
EBITDA = BULLSHIT. It’s a formula that most corporations use to measure. But if you ask Charlie Munger he might disagree with ebitda.
You need to calculate real net. Look at his statement, revenue and his cost and whats in his expenses (the middle part)
and whats remaining.
Now let’s see if you know what “real net” means and how someone is supposed to calculate that.
How fast is it growing on the top line and bottom line? For one dollar in revenue increase how does that hit the bottom line? do you have long-term contracts and what is revenue concentration like among the top 10 customers? Top 2?
If you scaled two twice the size, how much fixed costs would have to be added ? Is that normalized for owners comp and if not, can you add that back in and make it as if a manager was in your place or whatever role you fill.
People will give you multiples for your industry, but that means nothing because it’s really about how your actual business grows and scales and what kind of risk it has.
Based on last 3 years, but only year 10 is profitable… how does this make sense unless you’re in year 12? Is this a hotel?
What business is this? Is it manufacturing, retail or service industry? What product or service does it offer? Hard to give opinion or advise when key facts are missing. A consulting business vs a barbershop vs a retail or manufacturing business which can be run without the owner being present all can have different methods of valuations.
How’s a business owner even survive if not profitable for 9 years. Was it not profitable on paper only and the business owner was running tons of personal expenses through? Seen this happen and they increase the multiple to align more with true value…
Also are you going through a business broker…because they can explain how they valued the business (usually bullsh-t but at least you hear a story)
If the recent profitability is expected to be sustainable, I would argue a multiple based on 1 year sales would be best. Question is what multiple.
Often for a company that is growing (or has just flipped from loss to profit), the multiple is based on the next 3-5 years EBITDA not the last 3 years EBITDA.
The reason is that any price calculation is ultimately a way of calculating a lump sum in exchange for future cash flows.
This is why even unprofitable companies (with expectations of future profit) have a value greater than zero.
Then the question of what multiple is appropriate depends on all the usual things like competition, expected growth, etc.