Buying Up Businesses: Inside the Numbers | Green Bay Press Gazette

Scott Bushkie3:29 p.m. CDT May 9, 2015

I'm representing a company out west doing $20 million in sales with $4 million in earnings before interest, taxes, depreciation and amortization. That's in the mid-tier size for regional businesses, but it's not enough to get the national players excited about an acquisition. The big firms want opportunities closer to $10 million EBITDA.

But as I contact various strategic buyers in the region, I find a few baby boomer business owners who are also looking to sell. So after a few of those calls, I have a different story to tell.

Now we're partnering with a private equity group that might come in and buy not just my client, but one or two others of similar size. The acquisition makes sense for them because they know they can combine two or three of these businesses and reach that $10 million EBITDA target.

They'll package the companies under one central brand and then, about five years later, they'll resell to a large national company that will pay a higher price. Here's how a hypothetical acquisition/sell cycle might work:

Let's say the market for two or three small companies is $55 million in total (that's $11 million in EBITDA at a five multiple). The private equity firm might work out the economies of scale and add another $2 million in EBITDA through efficiencies alone.

Now that the repackaged business has $13 million EBITDA, it's attractive to a large public company. National firms pay higher multiples, meaning the new company could be valued at $104 million or $117 million ($13 million at an eight- or nine-multiple) in just a few short years.

Let's assume the private equity firm structured the original $55 million purchase with about 50 percent equity and 50 percent debt. With $27.5 million in equity, that $104 million sale comes in at about three times a return on their investment.

At the front end, the regional seller gets a good value for his or her business. But as deals get bigger and private companies get involved, multiples go up. Some call it multiple arbitrage.

And sometimes deals like this provide even better value for the seller because they're offered an opportunity to roll over equity into the new firm. They take chips off the table but leave some in the company, betting that business — infused with new resources and connections — will continue to grow.

For private equity firms, a 3x return in about five years seems to be a good benchmark. But one group I talked to recently gets, on average, a 9x return on their investment in seven years.

For sellers, it's helpful to know whether your business will be part of an arbitrage package. Understanding the buyer's potential ROI can help your adviser negotiate a fair price. Meanwhile, you should have a fair understanding of future plans so you can evaluate personal legacy concerns against potential financial return.

Article LINK

For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.