How do you evaluate/value when TTM pops significantly? - Searchfunder

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by a searcher from New Mexico State University
in Albuquerque, NM, USA

9mos ago

How do you evaluate/value when TTM pops significantly?

redactedI have noticed a trend, it seems all companies see significant rises in TTM revenue, doubling EBITDA percentage, etc. Clearly they are getting ready for a sale and perhaps putting off necessary expenses, or overcommitting themselves, or playing games with rev rec, etc. Wondering what experienced buyers do with their back of the napkin math before deeper DD? (besides the obvious: ignore the projections...40% EBITDA for the next 5 years, lol ;) ) Is it just a simple intuition on how to weight the past? (e.g. 40% TTM, 30% y-1, 20% y-2, 10% y-3)?

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reply by a searcher 8mos ago
from State University of New York (SUNY) in Buffalo, NY, USA

I bought a business with a 40% and 16% revenue growth in the two years prior to launching a sale process. The approach ultimately comes down to whether you believe this is a flash in the pan or a sustainable level of revenue / EBITDA. We got comfortable with the performance in most recent years and paid a slightly lower multiple than market. Would have been a very high multiple (and likely bankruptcy) if the performance went back to pre-growth levels though so still nerve wracking. Pushed for a forgivable seller's note contingent on hitting historical revenue numbers, but competitive process so couldn't get it done. We got comfort around the seller's story, which checked out with what we were seeing in the data provided around revenue and GP by customer. Also had some good industry tailwinds behind it. We have grown another 25% since close so it worked out, but recognize that it could have gone very, very poorly. Bottom line you need to assess their story for why performance has dramatically increased. If they don't have some kind of comment on it in their CIM I am more prone to disqualifying it right away. Brokers ought to know they need to explain it and if they aren't up front with it then they seem like they are hiding somethign. If the story doesn't sit right with you in any way or you see conflicting information in the data, I would move on or push a lot of purchase price into a forgivable seller note. In the financials you sent above the two things that jump out are the revenue pop in 2024 and the improvement in both Gross and EBITDA margin. 40% EBITDA margin businesses don't grow on trees and may require significant investment in OpEx to scale to the next level.

reply by a professional 8mos ago
from Marquette University in Wallace, MI 49893, USA

Back of the napkin is tough to know for sure but a QoE light analysis, properly executed, should answer those questions. As a starting point, pull industry growth stats and financial benchmarks then ask the seller to explain how and why they were able to do better. If response is plausible, advance to the LOI stage and test everything out.

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