ADDING TO OR SUBTRACTING FROM INDUSTRY AVERAGE MULTIPLE
Does the below seem reasonable?
Currently looking at a Commercial GC/CM opportunity with a 3-year CAGR of -14.5% (YoY Revenue Decline of[redacted]% in 2020 and[redacted]% in[redacted]a decent profit margin for the industry and a healthy pipeline (approx. a 35% - 50% increase from 2020 revenue)
The management team is in place/will convey with sale. The owner "seems" to have done a good job with transitioning to working on the business as opposed to in the business.
The industry multiple average is ~3.5 EBITDA.
Target's 2020 EBITDA is $1M.
I am kind of sticking my finger up into the wind with this but am thinking a 2.75 x EBITDA is a more appropriate multiple due to the multiple yearly revenue decline.
Am I way off? What would you suggest adding to or subtracting from the industry average of 3.5?
From what I can see, a seller should wait another 1-3 years to sell if their future projections are really that good - they would actually be crazy to sell now. I would be taking on all the risk and workload to realize that future projection and therefore it's mine, not the sellers.
I could use your experience and thoughts on this one. Thank you for the offer to call, I will reach out to set up a time.
Second, it is useful to adjust 2020 to consider what it would have looked like without covid. It's instructive to value a company for what it would have been worth if covid never happened.
2. If the fundamentals are good and the primary risk is "timing", then consider even higher offer with an earn-out, earn-down, a seller note with contingent payout schedule, or some sort of preference structure.
3. Be careful of structuring with sales. If I read correctly, 27% drop in sales in 2019 caused 60% drop in profit. This could be related to accounting and/or fixed costs.