This issue of Capital Ideas, our quarterly newsletter dedicated to business selling, business buying and financial resources for mid-market companies.
Beware of the EBITDA Multiple Trap
By Doug Nix, Managing Director, Toronto West Office
In today’s M&A environment, an EBITDA multiple is by far the most common methodology employed to value a privately owned business. It is used because of its simplicity and ease of calculation. In its basic form, the formula is:
EBITDA Multiple x Adjusted EBITDA = Debt Free Enterprise Value
These days, almost every valuation discussion with business owners and acquirers seems to focus entirely on the EBITDA multiple portion of the formula. This is understandable because there is widespread reporting of EBITDA multiples - its quarterly trends, averages by industry, mid points based on transaction size, etc.
But Mark Twain’s words “There are 3 kinds of lies – lies, damn lies and statistics” ring very true in using Reported EBITDA multiples ... Read more
Overcoming the “Private Firm Discount”
By David Sinyard, Managing Director, Atlanta Office
One of the first steps to selling a business is to determine its value. Valuation may be a complex exercise if the company for sale is private rather than public. Living in an age of information, investors are influenced by the amount of information available on a given opportunity, be it a publicly traded stock or a private company.
Publicly traded firms are highly regulated and required to provide snapshots of their financial health on a quarterly basis to all shareholders. There is significant information available on a public company, including SEC filings, investor relations departments, analyst reports, etc. Therefore, a company whose stock trades daily on an active exchange can be valued more easily than a privately held concern whose information remains confidential and private.
The lack of readily available information on private companies limits the amount of due diligence able to be performed by prospective buyers, ultimately resulting in a lower valuation compared to similar public companies. This deceased valuation, and thus lower sale price of the private company, is called the “private firm discount.” Is there any way to overcome the “private firm discount”? Definitely… Read more
Situation: Torus Freight Systems, headquartered in Richmond Hill, Ontario, is a leading freight management company, focused primarily on moving freight from the United States into Canada. A growing demand from their customer base to manage portions of domestic US freight left them unable to meet the demand. Torus’ corporate structure included four shareholders, with the majority shareholder wanting to retire, and the remaining three shareholders desiring to remain with the business but take some money off the table.
Solution: CFA Toronto West was initially hired by Torus in 2008 to sell the company. A competitive bid process was run, and resulted in multiple offers in late-summer 2008. However, as a result of the financial crisis of September and October 2008, the company was taken off the market until a better time. That better time came in June 2012, when the company went back on the market and CFA re-commenced the sale process. CFA contacted a select few prospective strategic buyers, resulting in several offers to acquire the business. A letter of intent was signed late-August 2012 with Texas-based Transplace, a CI Capital Partners portfolio company, looking for a strategic add-on. The sale of Torus Freight Systems to Transplace was completed December 3, 2012.
Corporate Finance Associates (CFA) is a founding member of ICFG, the 14th largest mid-market M&A firm in the world with over 40 offices in North and South America, Europe, and Asia. Since 1956, CFA has completed more than 5,000 transactions. CFA is ranked among the top eight of mid-market investment banks in Canada and top ten in North America by Thomson Reuters.
For additional information contact:
Douglas Nix, CA | Vice Chairman
Corporate Finance Associates | Toronto West | 905-845-4340 x211 | firstname.lastname@example.org