Multiples of EBITDA and Other Nonsense
Far too often, simplistic formulae are given the gold seal of approval for the best method of assessing business value – Formulae such as multiples of revenue or EBITDA, which don’t take into account the true value a business can bring to an acquirer. The elements that combine to create the final value of your business, are multiple and varied and cannot be grasped by a “one size fits all” approach.
A simple scan through our entire listing of deals concluded in the Software Tech sector, rapidly debunks the EBITDA method, revealing, as it does, that the EBITDA and revenue multiples achieved vary over a huge range. Yes, it is possible to create some statistical averages - but then again, an average can be created for anything. The question is, does it work as a useful guide and predictor? We think not.
Without doubt, EBITDA can and does factor in any assessment of business value, but overlaid on top, for business owners, are a number of potential pitfalls that can destroy the value of the business if not addressed.
7 Factors which can Have a Detrimental Effect on Your Business
1) Adopting a Passive Approach: If a business owner takes a passive approach to selling their business, they are likely to encounter many pitfalls. The first is caused by having only one, potential acquirer. Entering the acquisition process with a single acquirer, means that you end up dependent upon a non-competitive auction with only one bidder for the business. This typically happens when the business owner approaches their financial, banking or legal advisors to assist them with the sale of their business. Such professionals may be very knowledgeable in their field of expertise and can play a part in the acquisition / sale - but sales people they definitely are NOT! Another result of being passive about the sale of your business, is that you may be approached by a competitive company; unfortunately, such approaches rarely deliver value. Conversely, if you can establish a competitive bidding process with a number of interested parties, it serves, not only to elevate the final price tag but also, to validate the judgements buyers are making about the value they see in your business.
2) Lack of an M&A Strategy: You must have a comprehensive, exit plan in place, complete with a plan of action, to maximize your return on investment.
3) Losing Focus = Devaluation: When sellers take their eye off the ball during the business sales process, devaluation inevitably follows. Ensuring profitability of the business throughout the sales process is a top priority. To ensure that you can maintain focus on this, you need a competent M&A advisor to free you to make the decisions and take the actions that will continue to enhance value within your business.
4) Lack of Succession Plan or Management Depth: It is essential that you have a good management team in place so buyers are reassured that the value of the business will not be reduced by your departure.
Consider this: Could you currently go on holiday for three months, knowing that all would be well on your return?
5) Motivation of potential buyers: Over several decades of creating M&A deals in the Software Tech sector, it has been our experience that our clients are aware of fewer than half of their competitors; they normally believe that they know a much higher percentage than they do. Most are also very surprised when we explain why their direct competitors are unlikely to be the best buyers for their business.
6) Lack of Confidentiality: If the sale of your business is not handled in a confidential manner, then your competitors could use the possible sale of your business against you when the competitive bidding commences. In addition, the uncertainty of the sale scenario may further ‘rock the boat’ and result in customers and employees leaving you.
7) Inexperienced M&A Deal Making Team: The typical, proactive acquirer has an experienced team, including professional M&A advisors, lawyers and industry experts to call on. For the business owner, lacking access to a similarly experienced team can cost them dearly, in terms of the outcome of the sale of their business. Can your management team ensure you get a good valuation for your business? - with deal terms that work for you and your shareholders? And, importantly, can your team make sure the deal closes on time and does not drag on endlessly?
