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Beware the Benchmark Valuation and Unsolicited Offers

You can practice some back-of-the-napkin math to value a company, but it’s not always reliable. A company with $3 million in EBITDA (earnings before interest, taxes, depreciation and amortization), may, as a general rule of thumb, sell at a 4x to 6x multiple. In other words, it might sell for $12 million to $18 million in an average market.

If the company doesn’t have any outstanding qualities that make the business attractive from a buyer’s point of view (i.e., no management team, lumpy sales, no recurring revenue), accepting an unsolicited offer in this value range could make sense. But if the business does have a number of value drivers (see “Drivers of Business Value” blog), you’ll typically get better results on the open market.

Double the offer. We recently represented a software company that had received an unsolicited offer from a company in their industry. Prior to our involvement, the strategic buyer offered a standard multiple of roughly 3.5x to 4x EBITDA.

The owners weren’t sure how many people would want to buy their company and figured they’d probably move forward with the deal. But as the owners got into diligence, they began to feel uncomfortable and long story short, the deal ended up falling through.

We were brought into the process afterward and demonstrated where the buyer’s offer was weak (they were undervaluing some of the profit, for example), and ran a competitive M&A process instead. Multiple buyers came to the table and the business sold for almost double the initial offer.


So why did the company value ultimately come in so far above standard benchmarks? As a software company with many long-term customers, there was a certainty of future cash flows. Their customer base largely consisted of very sticky-stable government clients with little risk of customer default providing consistently high margins.

Plus, the owners were willing to stick around and manage the business post-transition, making it possible for a private equity firm or other non-strategic buyers to acquire the company. In all, several qualities in the business itself, plus certain conditions in the external market allowed us to position the company in a very attractive light, generating a value far above “normal” EBITDA multiple expectations.

Check before you accept. By definition, not every company is worth more than the average. If you get an unsolicited offer, get a second opinion before you accept. Ideally, you would talk to an M&A firm that’s represented businesses of your size and complexity.

If it’s a reputable firm and they see it’s a good offer, they’ll tell you. Sometimes unsolicited offers can make the most sense for buyer and seller. But don’t let a buyer pressure you into moving too fast. Give yourself time to get more information and a complete understanding of the offer.

Know your business’s value. Pulling a multiple on EBITDA is the most simplistic form of doing a valuation, but it doesn’t tell the whole story. It doesn’t account for standout business qualities that drive up value, and it doesn’t account for current market dynamics.

If you own a business, it’s a good idea to get an estimate of value every few years. Knowing what your business is worth (and what’s behind that value), can help inform your growth plans. Alternately, you may also find the business is worth more than you expected – and accelerate your exit plans.


Jeff MacKenzie

jeff.mackenzie@confederationgroup.ca

902.368.2125

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