RE:RE:RE:RE:RE:RE:they bought Oceean/CognisantMD for $10.57MM + $7MM Earn Outjdsd0517 wrote: Yeah, that's kind right, but not really.
BUYERS look at forward EBITDA to justify premiums. But they pitch SELLERS on current EBITDA. Savvy buyers buy and report on current, not future.
The reason is simple, buyers do not want to share the synergies they are bringing to the table with sellers. If I can make a lot of incremental revenue selling your product throught my established channels, why would I share that premium? I might give some of it away to get a deal done, or I might look at buying something else.
Well, sure, there will be negociations. Seller will produce a proforma with his different hypotheses and the buyer will negociate based on that. Odd items/events will be regularized.
In general, the EBITDA multiple will have been already agreed upon (or at least, there will be a range where both buyer and seller are willing to take a further look), and once the hypotheses are settled as being reasonable to both parties, the sale will happen.
As to hypotheses included in the proforma, those are always fully contained to the situation of the seller. If the seller had an exceptional year but lost a big client, the proforma will estimate EBITDA without that big client's revenue. In that situation, using current EBITDA, the buyer will be able to "show" a low EBITDA multiple.
For businesses worth a good amount (I'd take a guess at $2M+?), in general, both the seller and the buyer will have professionals handling the process. Profesionnals will always use regularized proforma statements to negociate a sale, and then the EBITDA multiple usually goes based on comparables in the sector and adjust based on the quality of the company of the seller (ie: if the seller has the top growth amongst comparable, the transaction will likely be done at the higher range of comparable or even higher).
Sometimes, if a business isn't per se for sale, a potential buyer might be willing to raise the EBITDA multiple offer based on the premium they can bring. In those cases, the buyer will pay a multiple that can be substantially higher than the comparables. If the premium that the buyer brings is high enough, this can be worth it and the only way to make the acquisition.
All this said, in general, a 5X EBITDA multiple applied on proforma statements is fairly cheap. Usually, a 4-5X EBITDA multiple is what smaller family business sell for.