Agreeing on a multiple

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April 15, 2021

by a searcher from IE Business School in Montreal, QC, Canada

Hey everyone,
I am getting close to signing an LOI for a deal but we need to first agree on a multiple of EBITDA and if we take an average of the last 5,4,3,2 or solely last years EBITDA. Wondering what you guys have used to value the business in terms of multiples, and then if you use last years EBITDA or an average?

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Reply by a searcher
from University of Virginia in Minneapolis, MN, USA
Amanda, there is some great feedback above. I would add the following, more general thoughts:
- I'd suggest offering a price and not a multiple. Obviously, they will want to know how you arrived at that price, so be prepared to explain your logic. But offer several different approaches (EBITDA multiple, DCF, Rev mult., etc) that arrive at generally the same place. When I use an EBITDA multiple exclusively, sellers always seem to start monkeying with the two variables in the equation - EBITDA and the multiple - which is counterproductive. Having multiple valuation approaches can prevent this behavior.
- You only get one chance to throw a first punch. Early in my search, I assumed sellers knew WAY more about valuation than most actually do. Truth is, most sellers are pretty unsophisticated (though bankers/brokers are changing this). So, I'd encourage you to make a fair, but low offer with enthusiasm/positivity. This should give you immediate feedback on a.) the bid/ask spread and b.) the seller's willingness to work on a creative solution. If the spread's big or the seller seems difficult, just politely walk away.
My two cents.
Best,
Al
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Reply by a searcher
from University of Southern California in 2121 Avenue of the Stars
I would take a step back and understand the revenue drives and customer relations with this business. If its a recurring revenue company, you are only as good as your last months MRR so to speak, so TTM is good unless there is significant COVID help which will flatten (pending type of biz). If its a non contractual business, TTM is still important but you can either base it off TTM if that is 'important' to the Seller and use a lower multiple or keep the multiple where the Seller feels they are being valued fairly and then stretch the TTM to be 1-3 or 1-4 years to back solve where you want to end up. Its more of an art...not science. This could all change however if you have an intermediary in Seller's ear, then you need to socialize more and more with the intermediary to see what they are pushing the seller to want. Good luck!
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