Self-funded Search Valuations

January 22, 2023

by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in New York, NY, USA

Self-funded Search Investors and Searchers,

How difficult is it for you to underwrite investments in self-funded searchers / acquisitions where the multiple is >5x LTM EBITDA?

I'll add some context to the question. Firstly, I'm a first time self-funded searcher focusing on my search full-time. Nearly all of the transactions I have pursued are in the $1-3M EBITDA range, with a few smaller and a few larger. I'm curious what valuation multiples others are seeing in transactions and investors are willing to underwrite as I have rarely seen any businesses where the seller would consider <4.5x EBITDA. The recent Search Investment Group Self-funded Search Study provided some great insights, but I find myself wondering what others are seeing and/or doing differently as I mostly have not had success bidding 3-4.5x EBITDA; at the same time it's clear this is where a lot of self-funded transactions are getting done. In many industries, companies trade at much higher multiples (even for small businesses) and sellers simply balk at the suggestion of 3-4.5x EBITDA, ultimately resulting in the seller dismissing the conversation. There are lot of factors that ultimately drive the valuation, but in the self-funded side of the search world, the sentiment certainly seems to point toward the idea that paying over 5x EBITDA is overpaying and will be a difficult deal to fund (irrespective of the industry, end market, business profile, etc.). Any and all thoughts or suggestions around how to approach the discussion would be appreciated.

Reply by an investor
from University of Oxford in San Francisco, CA, USA

Check this out for some idea of multiples' variance between size/sector. https://www.ibba.org/resource-center/industry-research/

So if you're at 1m+ ebitda those mutiples don't sound excessive.

Personally, I'm happier paying 4-5+ on EBITDA than SDE (as it suggests you do for that size of deal), though the devil is in the detail - some SDE is wildly imaginative, some is quite restrained. Then it depends on any loan % and terms, particularly as a high multiple will kill impetus/support for a financed deal if there's investment required and less reliable/repeat/recurring revenues.

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

The self-funded model works best with low multiple deals. If you are paying 4-6x on $1-3M of EBITDA, you will need to raise a relatively large equity check. Very difficult to pull off on self-funded terms. You could raise it from larger/professional investors if the deal is investment grade, but the equity economics will then be more in line with traditional search structure. So, for self-funded its often best to focus on deals in the $500k-$1.5M SDE range and target 2-4x multiples. If you have to raise from professional investor, its is likely best to pay up and look for scalable high quality $2-5M EBITDA companies that you can really grow fast organcially.

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