"I recently sold a business. I got 'five times' for it," one entrepreneur spoke proudly to another entrepreneur. Not wanting to spoil his associate's joy, the listening entrepreneur thought of only one thing: 'five times' what?
In the corporate finance world, the acquisition price of a company is often expressed as a factor the operating profit (possibly adjusted for depreciation), profit before tax or revenue. Corporate finance advisers who have several years in the business usually already obtain a reasonable idea of the size of the company and the market conformity of the acquisition price from the factor. But for entrepreneurs who do not deal with such processes on a daily basis, this can often be confusing and lead to tunnel vision.
EBITDA-multiple
The most common factor is the EBITDA multiple over a given period. This multiple looks at operating profit before depreciation and amortization. This profitability is often chosen because it is reasonably aligned with a company's operating cash flow (what cash flow will the company make over the next few years). In turn, the factor is an approach that does justice to (among other things) the market in which the company operates, the company's risk profile and a certain payback period from a buyer's perspective.
Initially, EBITDA is a reasonable indication of the company's operating cash flow. But a buyer will also consider the investments in property, plant and equipment and working capital that will have to be made by the company. Such investments are not reflected on the income statement and therefore are not considered in EBITDA. However, these items can have a major impact on the valuation of your business, as can the period over which this EBITDA is taken.
Profitability
Although profitability times a factor often gives an initial picture of the acquisition price, however, it by no means says it all: more often than not, it results in de ondernemingswaarde of a company. Normally, the entrepreneur will eventually receive a purchase price for his shares, which also takes into account the cash and debt positions on the balance sheet of the company in question. It could (theoretically) happen that an entrepreneur sells a business for 5.0x EBITDA, but ends up seeing only €1 deposited into his account because there is still a substantial debt position on the balance sheet.
A factor of 5.0x may ultimately result in a higher purchase price than a factor of 7.0x
A company's operating profit combined with a factor gives a first rough indication of the potentially realizable enterprise value. However, such a factor ignores important issues that could have a major impact on this value. Therefore, it is often wise to have a detailed valuation prepared using the discounted cash flow method.
Valuation
A corporate finance adviser starts a (sales) process with a thorough valuation. This gives you, the entrepreneur, insight into the possible sales proceeds and a factor 5.0x can ultimately result in a higher purchase price than a factor 7.0x. Of course it is also possible to have a valuation performed without directly entering the sales process, for this you can also contact a corporate finance adviser.
