Middle Market M&A — What’s My Company Worth? Part 2

In our first installment of this series of articles on the value of your company, we identified that your firm has multiple values concurrently — it depends on the type of buyer that is looking at it.  Each type of buyer is evaluating the benefits and risks . . . to the buyer.  The buyer does not care what the company is worth to you.  The buyer cares what the company is worth to her/him/them.  Period.

So, lets say that theres a buyer looking for a company in your industry of your size.  What do companies in your industry and of your size look like?  And, based on that, where does that put your company?

For the benefit of regular readers of this column, what quality of steak is your company?  Is it USDA Prime?  Is it USDA Choice?  Is it USDA Select?

It turns out that the Internal Revenue Service maintains statistics for each industry, which can be broken down into company size.  These statistics reflect the average balance sheet, income statement, profitability ratios,  revenue growth rate, etc., etc.  For example, lets say that you have a company in waste management and you have revenues in the $20 million to $50 million range.  The IRS statistics reflect a particular measure of earnings (EBITDA) as a percentage of revenue as being about 13%.  They will also reflect an annual revenue growth rate of roughly 5.4%.

The question becomes how your companys financials compare to these averages, as well as the various other statistics.  Now, brace yourself.  You need to understand that 80% of companies are not in a condition to be sold.  If your numbers fall in line with these IRS statistics, your company is USDA Select.  (If youd like the IRS statistics for your industry and size, please reach out.)

It also turns out that there are databases of done deals.  For each industry and company size, we can see what prices (multiples of EBITDA) are actually being paid.  One such database looks at purchases by private equity funds — think USDA Prime.  Another database looks at purchases by publics traded companies — this USDA Choice and USDA Prime.  This quality of steak is well above the IRSs average USDA Select.

Returning to our waste management example, private equity funds are buying companies with a profitability rate of 21% and a revenue growth rate of nearly 11%.  These numbers are head-and-shoulders above the industry averages identified by the IRS statistics.  This is USDA Prime.  This caliber of company has been purchased for roughly 6 times EBITDA.

If you are in tune with your industry, you will likely hear companies being sold for this multiple.  If your firm has those USDA Prime numbers, you can use that multiple as a starting point.  (In subsequent articles in this series on the value of your company, we will get into the adjustments to that starting point.)  But, if your firm has the USDA Select numbers seen in the IRS statistics, dont kid yourself.  Just accept it.  But, resolve yourself to do something about it.  Improve your company.

Can you take USDA Select beef and turn it into USDA Prime?  With apologies to the ranchers in the crowd, yes.  Maybe its swapping out your herd.  Maybe its feeding it corn.  (Grass-fed is a craze by those who dont know beef.  It leads to inferior flavor.  Every real rancher knows that corn-fed is the best.  It might not be as healthy but it is the best tasting.)  Maybe its a range of things — which we will discuss in coming articles.

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