Most Industry buyers will utilize a form of an EBITDA-Multiple valuation. In the case of small to midsize-cap agencies, they can expect a 3X to 4X Multiple for a baseline valuation. That is, unless there is a valuable point of differentiation. These days, the point of differentiation will likely be a more sophisticated version of digital media or search software or technology. In this case the basis of value moves from EBITDA to Gross Income, and in some cases, top line Revenue.
But, in a usual transaction, there are some guiding principles that determine how much near-term cash a seller will receive. The first of these is the more near-term cash received, the lower the overall value offered by the buyer. This is so because the more near-term cash paid out to the seller, the greater risk the buyer carries.
The schedule below illustrates this point. In this example, the initial valuation calculated the value of the business at around $8 million. But, the seller wanted a $10 million valuation. He insisted. So, the buyer stretched the purchase over 36 months and made the $10 million value contingent on the business achieving certain increasingly higher milestones, which when achieved, would support the higher valuation.
The buyer agreed to a 5X Multiple up from 4X, but kept the cash downpayment at 2X EBITDA. This clearly shifted more risk to the seller. In my mind, this offer would lead to further negotiation with the goal of taking the ceiling off of what the seller could ultimately make from the transaction. Instead, the seller rejected the offer and walked away.
C’est la vie. It is difficult to find fault in either of the parties. People are different. So, one will accept a deal that another would reject out of hand.
The schedule below summarizes the payments over a 3 to 4 year period. It was prepared on the basis of a forecast that set the milestones required to be met.
The takeaway is that as a seller, you can negotiate a price up to where you believe it should be, if you are willing to make concessions. It is critical that a seller understand the structure of the terms of his or her transaction. The price of a business sale can always be increased, if the seller will accept a change in the conditions.
Take a look at the chart below for a sample of Purchase Price Overview.
SMALL TO MID-CAP AGENCY VALUATION CHART
Stay tuned for my next AdBlog on Small Cap Marketing Agencies.
Henry Corona, Financesur
www.financesur.com • 305-748-0888