Adding to or subtracting from industry average multiple

by a searcher

3 years ago

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###-###-#### % in 2020 and###-###-#### % in###-###-#### 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?

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15 comments

searcher

Great points Dan and I suspect it has something to do with a major shift to GC work compared to CM/Owner's Rep previously.

3 years ago | like reply | 0 likes

searcher from University of North Carolina at Chapel Hill

Dan - glad to see you on the forum and congrats on getting a deal this far! All great points above on the valuation, but take a step further back and look at the business - a 27% drop in revenue equated to a 60% drop in EBITDA= tells me they have an operating expense problem. If you can identify how to create some operating leverage back in the business then you have something to measure the impact of the 50% gain in revenue the owner is bringing to the table, which is going to tie into the DCF and valuation. Another item to think about with declining revenue and large variations in EBITDA is capital structure and debt ratios - make sure you have the right amount of leverage that is sustainable during the EBITDA variations.

3 years ago | like reply | 1 like

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