In this posting I continue the discussion of issues that an acquiring company needs to address to get a better understanding of the potential acquisition target-before a deal is finalized. I pulled much of this content from an article written for The International Reprographic Association (IRga) newsletter, where I discussed a few of the issues and presented my thoughts.
One of the more difficult issues facing a prospective purchaser is trying to determine how realistic a seller’s expectations are. Many sellers are basing their expectations on word-of-mouth comments from fellow owners who have sold, which in many cases is more bravado than fact. If a seller has had a professional valuation prepared, the seller is usually willing to share that with you, e.g. “This is what the valuation stated, but I think it is low.” At least you have an idea that the seller is somewhat realistic. This prevents wasted time dealing with a person who has an inflated value in mind.
There are numerous ways to value a potential acquisition and the most common by far is a multiple of EBITDA (earnings before interest, income taxes, depreciation and amortization). The EBITDA is then adjusted for items such as tax planning costs, personal perks, non-related business expenses, etc. This gives you an Adjusted EBITDA which is then multiplied by an industry multiple to determine the overall range of value. Multiples vary by industry, label converters are seeing multiples in the 5 to 7 time range, with commercial printers looking at 2 to 4 times. The multiple ranges vary as relates to quality of customers, profitability, innovative products, and markets served to name a few.
It is important to determine if you are dealing with a realistic seller. Much time can be lost if the seller is unrealistic.
If you want to chat, give me a call at 201-523-6326 or Email me at tcobery@epicomm.org.