Adding to or subtracting from industry average multiple

February 08, 2021

by a searcher in Tampa, FL, USA

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?

Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA

Dan, the value of a company is substantially based on the buyers projection of future earnings. Oftentimes the revenue of a GC is dependent upon bidding activity and accuracy as well as aggressive marketing. If the GC has a niche advantage over the competition, but has not been leveraging it, then a positive going-forward projection may be appropriate assuming that you, as the new owner, can make the growth happen. You need to understand why the sales have declined (the story). Otherwise the past is the predictor of the future. If it were me, if the owner can’t persuade you as to why the future will be substantially better, I would take a pass. While I dislike earnouts, it might be appropriate in this case. Feel free to call me.

Reply by a searcher
from University of North Carolina at Chapel Hill in Nashville, TN, USA

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.

+13 more replies.

Join the discussion