February 28, 2024 • 11 mins
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.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Welcome to the South Florida M&A Advisors podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Speaker 2 (00:13):
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, allright.
So we've been talking and goingthrough this recent deal that
you had $100 million deal andgoing through the different
topics or different componentsof the deal and curious about
(00:34):
valuation.
Right, somebody out there hereis $100 million deal.
How do you land on a value of acompany?
What goes into that?
Can you, I guess, dissect thatand talk about how the valuation
process works in the context ofa large-scale M&A deal?
Speaker 3 (00:49):
So if you are working with private equity groups,
your valuation will be based ona multiple of EBITDA earnings
before interest, taxes,depreciation and amortization.
It's a counting term.
You can look up on Google andall that good stuff.
Speaker 2 (01:05):
What is the multiple?
Is it a standard amount?
Is it different per type ofbusiness You're going to be?
Speaker 3 (01:11):
classed as either a platform investment by the
private equity group or anadd-on acquisition.
So let's work our way north.
If our private equity groupcomes in and says we're in the
space already, we have anexisting platform, let's use the
roofing.
We made that first investmentand now we're looking to add on
(01:36):
to our platform investment.
That is very common in today'sworld, and so what happens is
they already made the biginvestment and now they're just
adding to their platform tobuild out the whole platform.
So you got your platform andthen you got your add-on
acquisition and so it's based ona multiple of EBITDA, and so
(02:00):
typically we're going to seebetween, let's say, four to five
, maybe five and a half, justdepending on the economy.
The economy does affect it too.
If you go into a recession or amajor recession, the multiples
will go down.
On a great economy, themultiples will go up.
So you got to first define whatare you to the private equity
(02:25):
group.
If you're an add-on acquisition, you're not going to get the
eight to 10 multiple becausethey already made that
investment in a platform.
So, for example, this roofingcompany that we just recently
sold, this was the firstinvestment for this private
equity group, and so they madethis roofing company the
platform investment.
(02:46):
This particular company had anEBITDA of $13.5 million.
They paid $100 million, soyou're probably looking at a 7.5
multiple.
So to be considered a platforminvestment for these private
equity groups, you have to havethe higher level EBITDAs $5
million, $7 million, $10 million, $15 million.
(03:10):
When a private equity group islaunching their platform,
they're looking for those largerEBITDAs to give the better
multiples.
If you're sitting $1 million,$2 million, $3 million, you're
not going to get those samemultiples.
And I'm not talking abouttechnology business, I'm talking
about your contractors, yourdistribution, manufacturing
(03:34):
companies.
So it just all depends whereyou are in your EBITDA.
So if you have aspirations of ahigher multiple, then you got
to grow the business moreBasically that's really what it
comes down to.
Speaker 2 (03:47):
So can you explain the differences between
asset-based, income-based andmarket-based valuation methods?
Speaker 3 (03:59):
Okay, very good, I'll give it a shot at it.
I don't know the exactdefinitions.
I guess the asset base islooking at the assets that you
have and putting a valuation onit based on the asset value.
Market base, where you're goingout and seeing what the market
(04:24):
multiples are, and then incomebase is based on a multiple of
EBITDA.
So there's a couple differentvaluation methods and obviously
a certified business appraiser.
If you decide that you wantyour business valued by a
certified business appraiser,then that's the best way to know
(04:45):
what the business is worth.
For that point in time You're abusiness valuation.
Let's say, if you did it forthe 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 onthe following year, if we're
talking, let's say, 24, sixmonths, in nine months in, your
numbers are down well, thatvaluation that you did on 23, 22
(05:08):
, and 21 is changed.
So business valuation canchange significantly really
quickly if you're notmaintaining the business or
growing the business.
So be very careful.
You know when your businessvaluations do change really
quickly.
So maintaining numbers is vital.
(05:29):
As an advisor to keep theintegrity of the price.
I always tell the seller keepthe gas on the pedal while we're
going through this process,because they are looking for
your financials 30 days up theclosing.
They want to make sure thatyou're not falling asleep at the
wheel while this process isgoing on, because that's what
(05:52):
they're walking into.
They're working into thatfuture workflow.
They don't want the seller well, they're cashing out and trying
to cash out as much as possibleand they just you know they're
ready to go on vacation.
No, this is.
Your journey with the privateequity group has just begun.
Speaker 2 (06:08):
So what are some challenges or obstacles that
you've encountered when it comesto valuation?
Because I'd imagine obviouslythere's two sides to this.
The seller wants to get themost for the business, the buyer
wants to get the best deal.
There's obviously some conflictthere.
What are some struggles orchallenges that you faced and
how have you overcome that asthe advisor?
Speaker 3 (06:26):
You know, a lot of times people hear from other
people maybe they're CPA orfriend and so for multiple of
sales and they're really notgetting the right information
and that's why we try to directthem to a certified appraisal.
Basically, when we bring abusiness out to the to actually
(06:49):
be marketed to a set approvedbuyer list, we actually don't
put a price on the business.
We come out, we put the SIMtogether, put the teaser
together, we organize theengagement and we don't come out
with a price.
We're trying to create anenvironment where let the buyer,
(07:10):
let us know what it's worth.
Now, for example, I'm selling afire protection company and you
know seller had in his mind sixand a half, seven million let's,
for example, and, and I thoughtyou know, eight was a great
number that the seller wouldaccept.
We ended up getting nine, whichwas great, and that's the
(07:32):
beauty because we didn't put aprice on it.
And so that's what happens youput a price and they put a
multiple EBITDA and you don'tknow what, what the buyer is
thinking, because they'rethinking four and five times
EBITDA and so yeah, so the.
So sometimes you meet andexceed the seller's expectations
because you're not setting aprice and you let the, let the
(07:55):
marketplace determine the price.
Speaker 2 (07:58):
That makes sense.
I have a question for you,russell.
Do you exclusively handleprivately held companies, or
have you ever done a transactioninvolving a publicly held
company?
Speaker 3 (08:08):
I only handle privately held companies.
I was involved in a M&Atransaction where a publicly
traded company bought aninternet company and so that was
challenging in itself becausewe had to go.
You know, it's a little moreregulated when you're dealing
with a publicly traded company,so that was great experience and
(08:28):
very professional, had reallygreat experience, great
professional people to deal withand and they, you know, and
obviously with a, you knowthey're buying at a multiple,
let's say three to five, andthen you know they're trading at
22 times multiple.
So so they want to buy thosecompanies because they, you know
, they try and try to drive upthe stock price and and if they
(08:52):
can bring in a huge EBITDA at alow multiple and you know it
just multiplies itself out crazy.
So so, yeah, differentmultiples with publicly traded
companies versus, you know, ifyou're selling a main street
business versus if you'reselling businesses in the
private equity, mergers andacquisitions the multiples keep
(09:12):
going up and up and up until youget to the publicly traded
company where the mutuals are.
You know, hard to believe right?
Speaker 2 (09:19):
Yeah, well, I was interested in how the valuation
works between from private topublicly held companies.
It just seems like we thoughtthe privately held transactions
were complicated enough.
You know, you get into thesepublicly held, just it's just
more, more people involved withthe process, more.
You know, yeah, a lot of timesthey like to throw in the stock.
Speaker 3 (09:37):
You know you get a chunk of money and then they're
offering you stock and they wantyou to keep on.
You know, stay on and help runthe company.
It's very hard to exit thecompany quickly.
They're going to want you tostay on one to two years, even
in with a publicly tradedcompany.
They don't want to.
They don't want to run yourbusiness.
They need people to run thebusiness.
You know.
Speaker 2 (09:57):
Yep, yep, all right, I anything else from this?
I'm sure this is a deep topic.
We could probably talk aboutthis for for hours upon end, but
is there anything else youwanted 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 basiccalculation of value report,
could run, you know, three,three grand, let's say minimum.
Let's say, and you know, eventhough you trust your CPA, if
your CPA is a certified businessappraiser, then he or she can
(10:29):
give you a valuation on yourbusiness.
If they don't have thosecredentials, then it is as good
as my broker.
Opinion of value.
Basically.
Speaker 2 (10:39):
All right.
So for anyone out therelistening that's owns a business
looking to sell, get in touchwith some professionals, reach
out, learn more about how.
And Russell helps clients thathe works with through M&A South
Florida M&A advisors Russellalways a pleasure.
Thank you All right.
Everyone thanks for tuning inand we will catch you next time.
(11:00):
Take care.
Speaker 1 (11:03):
Thanks for listening to the South Florida M&A
advisors podcast.
For more information, visitSouth Florida MAcom or contact
954-646-7651.
Welcome to the South Florida M&A Advisors podcast,
your trusted M&A team.
Here's your host, Russell Cohen.
Speaker 2 (00:13):
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, allright.
So we've been talking and goingthrough this recent deal that
you had $100 million deal andgoing through the different
topics or different componentsof the deal and curious about
(00:34):
valuation.
Right, somebody out there hereis $100 million deal.
How do you land on a value of acompany?
What goes into that?
Can you, I guess, dissect thatand talk about how the valuation
process works in the context ofa large-scale M&A deal?
Speaker 3 (00:49):
So if you are working with private equity groups,
your valuation will be based ona multiple of EBITDA earnings
before interest, taxes,depreciation and amortization.
It's a counting term.
You can look up on Google andall that good stuff.
Speaker 2 (01:05):
What is the multiple?
Is it a standard amount?
Is it different per type ofbusiness You're going to be?
Speaker 3 (01:11):
classed as either a platform investment by the
private equity group or anadd-on acquisition.
So let's work our way north.
If our private equity groupcomes in and says we're in the
space already, we have anexisting platform, let's use the
roofing.
We made that first investmentand now we're looking to add on
(01:36):
to our platform investment.
That is very common in today'sworld, and so what happens is
they already made the biginvestment and now they're just
adding to their platform tobuild out the whole platform.
So you got your platform andthen you got your add-on
acquisition and so it's based ona multiple of EBITDA, and so
(02:00):
typically we're going to seebetween, let's say, four to five
, maybe five and a half, justdepending on the economy.
The economy does affect it too.
If you go into a recession or amajor recession, the multiples
will go down.
On a great economy, themultiples will go up.
So you got to first define whatare you to the private equity
(02:25):
group.
If you're an add-on acquisition, you're not going to get the
eight to 10 multiple becausethey already made that
investment in a platform.
So, for example, this roofingcompany that we just recently
sold, this was the firstinvestment for this private
equity group, and so they madethis roofing company the
platform investment.
(02:46):
This particular company had anEBITDA of $13.5 million.
They paid $100 million, soyou're probably looking at a 7.5
multiple.
So to be considered a platforminvestment for these private
equity groups, you have to havethe higher level EBITDAs $5
million, $7 million, $10 million, $15 million.
(03:10):
When a private equity group islaunching their platform,
they're looking for those largerEBITDAs to give the better
multiples.
If you're sitting $1 million,$2 million, $3 million, you're
not going to get those samemultiples.
And I'm not talking abouttechnology business, I'm talking
about your contractors, yourdistribution, manufacturing
(03:34):
companies.
So it just all depends whereyou are in your EBITDA.
So if you have aspirations of ahigher multiple, then you got
to grow the business moreBasically that's really what it
comes down to.
Speaker 2 (03:47):
So can you explain the differences between
asset-based, income-based andmarket-based valuation methods?
Speaker 3 (03:59):
Okay, very good, I'll give it a shot at it.
I don't know the exactdefinitions.
I guess the asset base islooking at the assets that you
have and putting a valuation onit based on the asset value.
Market base, where you're goingout and seeing what the market
(04:24):
multiples are, and then incomebase is based on a multiple of
EBITDA.
So there's a couple differentvaluation methods and obviously
a certified business appraiser.
If you decide that you wantyour business valued by a
certified business appraiser,then that's the best way to know
(04:45):
what the business is worth.
For that point in time You're abusiness valuation.
Let's say, if you did it forthe 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 onthe following year, if we're
talking, let's say, 24, sixmonths, in nine months in, your
numbers are down well, thatvaluation that you did on 23, 22
(05:08):
, and 21 is changed.
So business valuation canchange significantly really
quickly if you're notmaintaining the business or
growing the business.
So be very careful.
You know when your businessvaluations do change really
quickly.
So maintaining numbers is vital.
(05:29):
As an advisor to keep theintegrity of the price.
I always tell the seller keepthe gas on the pedal while we're
going through this process,because they are looking for
your financials 30 days up theclosing.
They want to make sure thatyou're not falling asleep at the
wheel while this process isgoing on, because that's what
(05:52):
they're walking into.
They're working into thatfuture workflow.
They don't want the seller well, they're cashing out and trying
to cash out as much as possibleand they just you know they're
ready to go on vacation.
No, this is.
Your journey with the privateequity group has just begun.
Speaker 2 (06:08):
So what are some challenges or obstacles that
you've encountered when it comesto valuation?
Because I'd imagine obviouslythere's two sides to this.
The seller wants to get themost for the business, the buyer
wants to get the best deal.
There's obviously some conflictthere.
What are some struggles orchallenges that you faced and
how have you overcome that asthe advisor?
Speaker 3 (06:26):
You know, a lot of times people hear from other
people maybe they're CPA orfriend and so for multiple of
sales and they're really notgetting the right information
and that's why we try to directthem to a certified appraisal.
Basically, when we bring abusiness out to the to actually
(06:49):
be marketed to a set approvedbuyer list, we actually don't
put a price on the business.
We come out, we put the SIMtogether, put the teaser
together, we organize theengagement and we don't come out
with a price.
We're trying to create anenvironment where let the buyer,
(07:10):
let us know what it's worth.
Now, for example, I'm selling afire protection company and you
know seller had in his mind sixand a half, seven million let's,
for example, and, and I thoughtyou know, eight was a great
number that the seller wouldaccept.
We ended up getting nine, whichwas great, and that's the
(07:32):
beauty because we didn't put aprice on it.
And so that's what happens youput a price and they put a
multiple EBITDA and you don'tknow what, what the buyer is
thinking, because they'rethinking four and five times
EBITDA and so yeah, so the.
So sometimes you meet andexceed the seller's expectations
because you're not setting aprice and you let the, let the
(07:55):
marketplace determine the price.
Speaker 2 (07:58):
That makes sense.
I have a question for you,russell.
Do you exclusively handleprivately held companies, or
have you ever done a transactioninvolving a publicly held
company?
Speaker 3 (08:08):
I only handle privately held companies.
I was involved in a M&Atransaction where a publicly
traded company bought aninternet company and so that was
challenging in itself becausewe had to go.
You know, it's a little moreregulated when you're dealing
with a publicly traded company,so that was great experience and
(08:28):
very professional, had reallygreat experience, great
professional people to deal withand and they, you know, and
obviously with a, you knowthey're buying at a multiple,
let's say three to five, andthen you know they're trading at
22 times multiple.
So so they want to buy thosecompanies because they, you know
, they try and try to drive upthe stock price and and if they
(08:52):
can bring in a huge EBITDA at alow multiple and you know it
just multiplies itself out crazy.
So so, yeah, differentmultiples with publicly traded
companies versus, you know, ifyou're selling a main street
business versus if you'reselling businesses in the
private equity, mergers andacquisitions the multiples keep
(09:12):
going up and up and up until youget to the publicly traded
company where the mutuals are.
You know, hard to believe right?
Speaker 2 (09:19):
Yeah, well, I was interested in how the valuation
works between from private topublicly held companies.
It just seems like we thoughtthe privately held transactions
were complicated enough.
You know, you get into thesepublicly held, just it's just
more, more people involved withthe process, more.
You know, yeah, a lot of timesthey like to throw in the stock.
Speaker 3 (09:37):
You know you get a chunk of money and then they're
offering you stock and they wantyou to keep on.
You know, stay on and help runthe company.
It's very hard to exit thecompany quickly.
They're going to want you tostay on one to two years, even
in with a publicly tradedcompany.
They don't want to.
They don't want to run yourbusiness.
They need people to run thebusiness.
You know.
Speaker 2 (09:57):
Yep, yep, all right, I anything else from this?
I'm sure this is a deep topic.
We could probably talk aboutthis for for hours upon end, but
is there anything else youwanted 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 basiccalculation of value report,
could run, you know, three,three grand, let's say minimum.
Let's say, and you know, eventhough you trust your CPA, if
your CPA is a certified businessappraiser, then he or she can
(10:29):
give you a valuation on yourbusiness.
If they don't have thosecredentials, then it is as good
as my broker.
Opinion of value.
Basically.
Speaker 2 (10:39):
All right.
So for anyone out therelistening that's owns a business
looking to sell, get in touchwith some professionals, reach
out, learn more about how.
And Russell helps clients thathe works with through M&A South
Florida M&A advisors Russellalways a pleasure.
Thank you All right.
Everyone thanks for tuning inand we will catch you next time.
(11:00):
Take care.
Speaker 1 (11:03):
Thanks for listening to the South Florida M&A
advisors podcast.
For more information, visitSouth Florida MAcom or contact
954-646-7651.
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