How do you consider EBITDA multiples for Self Funded searches?

November 09, 2019

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Santa Clarita, CA, USA

Adjusted EBITDA usually takes out the current CEO/Owner's salary and adds back a nominal salary at a low end. When you offer to the sellers and go for financing with banks (SBA loans etc.), do you take out your salary (higher than nominal salary assumed by seller) and give them valuation based on your adjusted EBITDA? I keep hearing 3-5x multiple and curious how self funded searchers do it.

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Reply by a searcher
from University of Texas at Austin in Austin, TX, USA

I like to think about it from the owner's perspective. They've run this company for 20 years and have taken $XXX,XXX salary (at market or perhaps below market), and they've lived a more than fine->good life. What they care about is not the salary that you are going to take but how much you are going to pay them for their business. Now, if salary makes a huge difference in the valuation (you may be paying too much for the business and/or the business may be too small!) you'll have some explaining/teaching and learning to do w/the owner (your near and perhaps long-term partner) (they may think they can be removed from the business entirely with no replacement). If the deal structure is a moving target because the owner wants to finish out the year and then you have an agreed upon multiple to a certain ebitda calculation, then you will have had to agree with the owner as to what the adj. EBITDA calc would have been (including your salary).

For the bank, they'll want to see market rate (they want to know the business can survive without you and if you had to hire someone they'd want to know that they can keep desired coverage ratios with that salary. For the bank it will be about coverage ratios, so figure out what that coverage ratio is and depending on what you're paying for the business you may be able to use your salary as a lever to come in at the right ratios.

Hope that helps. Sean

Reply by an investor
from Skidmore College in San Diego, CA, USA

To add to what's being discussed, we use a broader 'backfill' approach to get to true EBITDA. What are the responsibilities of the owner, and how much to replace them all? Owner's salary is the obvious one, but there are times when an owner's skillset isn't necessarily replicable via one position, or an owner is truly undercompensated relative to market. You'll also see spouses and other relatives in transactions that will be transitioning out with the owner and may need to considered. We try to be overly conservative in our assumptions.

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