How reliable are deal multiples (EV / EBITDA) in the Private Mid-Market?
Most private company owners are aware of ‘Deal Multiples’ – the idea that a multiple of profit, or EBITDA, becoming the central tool for a company valuation. But how reliable are deal multiples (EV / EBITDA) in the private mid-market?
There is a plethora of market data discussing ‘EBITDA multiples’ – some of it widely available on the web, some of it shared or sold by various commercial firms operating within the M&A market – accountants, M&A firms, corporate finance houses, financial / credit data providers and a plethora of business brokers.
But how reliable is the market data? And how can you ensure you are not comparing ‘apples with oranges?’
From our perspective, clear and well-defined terms are fundamental for comparing deal values in a company sale. The importance of clear definitions facilitates realistic price expectations for company owners.
Let us provide a recent example.
Undertaking market research for a client, we obtained detailed analytics from a global financial platform on a specific transaction that we were interested in.
Business A Limited was sold to Business B Limited (all identifiers have been removed from the example and data rounded). The financial platform stated that the EBITDA multiple on this specific deal was 8 x.
This piqued our interest. Business A Limited operates in a conventional business sector where multiples tend to sit in the 3.0 – 4.5 x range.
So, our analysts took a much deeper dive into the data and extracted both buyers and sellers statutory accounts. Here is what we found.
Business A’s EBITDA was c.£0.5M. The business owned freehold land, valued at cost at £1.7M. The business had free cash around £0.6M. The business was sold for £4.0M and included the freehold land and the surplus cash. The market value of the freehold was not available but will be higher than the book value.
We estimate that the true EBITDA multiple would be around 2.8 – 3.5 x for this transaction.
The difference is quite simple. The financial platform used the deal value, £4M in this case, and simply divided it by the profit (EBITDA) – £0.5M. Hence £4M / £0.5M = 8.0 x.
This method is misleading. The reason being is that land and surplus cash assets do not form part of the Enterprise Value and should have been removed from the calculation.
In this example, we have an instance of comparing ‘apples with oranges!’
As can been seen in the example above, understanding the published data sets is vital for accuracy in multiples, and adjustments might need to be made when seeking meaningful comparisons.
Clear definitions create a common language for all parties involved, including buyers, sellers, financial advisors, legal and M&A professionals. This reduces the likelihood of misunderstandings and ensures that everyone interprets the terms consistently. Clarity is based on a shared understanding of the deal’s financial components critical for accurate valuation and deal value.
Precision in Measurement
Accurate definitions help in precisely measuring the components of deal value. Whether it’s the purchase price, assumed liabilities, contingent payments, or other considerations, having well-defined terms ensures that the valuation accurately reflects the economic reality of the transaction.
In the context of a company sale, deal value, equity value and enterprise value are distinct financial metrics that help characterise the different aspects of a transaction.
Here’s a brief explanation of each term:
Deal Value
Definition: Deal value represents the total consideration paid by the acquirer to the seller in a business transaction. It encompasses all the elements of the deal, including the purchase price, deferred consideration, assumed liabilities, any contingent payments (e.g., earn-outs) and any other financial components agreed upon between the buyer and the seller.
Deal value is the most comprehensive metric, considering not only the cash or stock payment made at the closing of the deal, but also any additional payments that may occur in the future based on certain performance or milestone criteria.
Enterprise Value
Definition: Enterprise value (EV) is a measure of a company’s total value, representing the sum of its equity value and its net debt. Net debt is calculated by subtracting cash and cash equivalents from the total debt. Enterprise value provides a more comprehensive view of a company’s value, including both equity and debt holders.
Enterprise value is calculated as: EV = Equity Value + Net Debt
Equity Value:
Definition: Equity value, also known as shareholder value (or market capitalisation for a PLC), represents the total value of a company’s equity, which is the ownership interest held by shareholders. In the context of a sale, equity value is the value attributed to the owners (shareholders) of the selling company.
Equity value is calculated by taking the enterprise value (EV) and subtracting the value of any outstanding debt and debt-like items. It is customary (but not always the case) that surplus cash is added. And to make life just a little more complicated, often the equity value is subject to an adjustment for normalised working capital, assuming a completion accounts rather than a locked box mechanism.
Conclusion
In the realm of mergers and acquisitions (M&A), public company data is normalised which makes comparisons between PLC’s easier to rely on.
However, in the private market (e.g., Private business ‘A’ acquires Private business ‘B’), there is much less transparency with regards to deal values published, or to claimed ‘EBITDA multiples.’
There are various ‘actors’ who may have commercial reason to skew the data. Business brokers may have a reason to publish higher multiples (to attract clients) and financial / credit platforms may simply scrape data from public business registers and conduct no detailed analytics – very often the ‘small print’ data tucked into statutory accounts is the only real giveaway as to the deal structure and value…
These financials aren’t necessarily incorrect, but the reader must be aware that differing methods may have been used!
Standardising definitions allows for a meaningful comparison between different transactions. This comparability is crucial for benchmarking, market analysis, and understanding industry norms (such as on multiples), so, comparing apples to apples.
Understanding these terms is crucial for various stakeholders involved in a business sale, including buyers, sellers, and financial professionals, as each metric provides a different perspective on the financial aspects of the transaction. If you are a business owner wanting to understand the true value of your business for a potential sale, contact us here.
Tags: analysts, company owner, company sale, comparison, deal, deal multiples, deal value, definitions, different structures, EBITDA, Enterprise Value, equity value, EquityValue, EV, financials, granularity, M&A, multiples, NetDebt, normalised, price expectation, private companies, private company sale, published data, self-reported data, shareholder decisions, value
