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.
1. You're not entirely off-base. The rise of PE has shown the private markets to be getting more expensive than even the public markets.
2. You're probably not seeing enough deals (and proprietary deals at that)
3. Valuation highly dependent on the the industry, so without any further guidance it's hard to say
4. Don't let the focus on multiples throw you off. Look to the terms. If the seller wants 9x EBITDA, and you negotiate the terms (seller finance, buyout over time, etc) to ensure a margin of safety (both operationally and from a debt coverage perspective), then you still have something that could be worth pursuing.