Need help on valuation

September 07, 2023

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

I'm a self-funded searcher about to submit an LOI, and I'm seeking advice on the valuation. Some of the business attributes:
- ~$2.5M EBITDA
- Home services business
- Strong management team in place staying with the business post-deal
- High recurring revenue (70%+) with very low churn
- Diversified revenue streams
- Long, profitable track record (20+ years in business)
- Ample growth/expansion opportunities

It's going to be a competitive process. I want the deal but obviously don't want to overpay. My worry is that this will command a purchase price significantly higher than like a 4x EBITDA. For a business like this, is it feasible to push the valuation to 5x EBITDA or higher for a self-funded searcher? Any thoughts on capital structure (SBA + conventional loan + investor equity)?

Thanks!

Reply by a searcher
from Southwestern University in Houston, TX, USA

You're going to be up against every PE fund doing the trendy Home Services thing. This will almost certainly go for 5Xish. And the downside of pursuing the hot thing in the industry is that they PE firms will have a significant portion in cash.

If they have a full management team in place, you lose a lot of your potential advantage as a self-funded searcher (knowing the operator that you're getting, knowing that this will continue to be a brand going forward, etc.) Your remaining advantage is that you will care about this specific business and strive to make it better vs lumping it together with 10 other businesses to sell in 3-5 years.

There's a significant possibility that your PE competitors will be offering to buy 60%- 80% of the business and giving the current owner a second exit when they inevitably roll this up and get paid 10X+ for the larger whole. That's going to be hard to compete against.

Reply by a searcher
from University of Tennessee in Nashville, TN, USA

You have access to BVR on this platform. Identify the NAICS for the business that you are buying and look at historical transactions of that business type to set the EBITDA multiple range. There are other factors to consider at your discretion (financial metrics, deal terms, etc.) beyond the multiple.

Every transaction needs an agreement on three basic pillars: price, terms, and time. In the most successful transactions, the Buyer gets one pillar, the Seller gets one pillar, and the third is negotiated. If either side is greedy or desperate, that balance will skew. Your offer is more than just price. Don't ever forget that.

Good luck!

+8 more replies.

Join the discussion