A significant number of listings I am receiving have EBITDA numbers that look similar to the following (with revenue numbers increasing with the same rate):
###-###-#### ,500,000
###-###-#### ,000
###-###-#### ,000
###-###-#### ,000
What is your recommendation on the following regarding such businesses:
1. Would you even consider such businesses or just move on (as per the HBR guide, enduringly profitable businesses generally grow slowly. Also if the###-###-#### years old company had a potential to grow like this, wouldn't it be much bigger company now)?
2. If you consider such businesses, how would you value them? Would you take average EBITDA or Weighted Average or something else?
3. If you consider such businesses, what would your pre-LOI diligence look like? what questions you would ask the seller, what numbers would look from in the CIM, etc.
Pre-QoE, we generally examine the financials to validate the jump (more concerned about profit than revenue) and set value based on 3 year averages which smooths bumps up or down.
I can't tell you the number of times a broker or owner have said, "We're skyrocketing the next few years!" and setting the value based on the skyrocket.
I'm actually fine doing that, but we're going to pay out after the skyrocket arrives. Within seconds that same person will say, "Well, we can't guarantee it!"