Valuations

May 08, 2021

by a searcher from Rice University in Houston, TX, USA

I am new to the Search world and have been a self searcher for a year and a half. I have looked at a few deals and am trying to understand valuation multiples in this stage of the cycle. Any pointers on rationalizing 8+ EBITDA on micro or lower mid market deals? Thank you for your help in advance.

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Reply by an intermediary
from Wisconsin Lutheran College in Brookfield, WI, USA

First need to define what you mean by micro and lower mid market. If we are talking about businesses under $5 million in revenue, you may be looking at different value methodologies for main street businesses., Very often there you will encounter SDE or SDCF multiples which add back owner comp and other discretionary expenses. A different value approach which may lead to EBITDA multiples like you describe. Those businesses also tend to have more hands-on owners where the role as owner might be a little different. Usually at that level owners are more concerned with tax implications vs maximizing EBITDA, so often EBITDA multiples on businesses of that size are not a good representation of value. What is your target value or EBITDA range?

Reply by a searcher
from Simon Fraser University in Vancouver, BC, Canada

Assuming you're not talking something like b2b SaaS - you are absolutely right, it's very hard to rationalize.

It's easier to run a company, buy a company, and raise equity for a deal with $3M - $5M in EBITDA than something under $2M in EBITDA but over the last two years it seems like multiples for companies in the SBA-range have shot up massively which makes microcap lose a lot of the appeal it used to have IMO.

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