CHAPTER 14 How Much Should You Pay for a Small Business? Flashcards
(25 cards)
What is the typical purchase price multiple for enduringly profitable small businesses?
Between 3x and 5x EBITDA.
What is the typical EBITDA range for small businesses discussed in the book?
$750,000 to $2.0 million.
Why might a business sell for less than 3x EBITDA?
If it is distressed or underperforming.
Why might a business sell for more than 5x EBITDA?
If it has high growth potential or strategic value.
How do larger companies typically compare in EBITDA multiples?
They often sell for 6x to 12x EBITDA.
What factors influence whether a business commands the high or low end of the 3x–5x EBITDA range?
Growth, predictability, cash flow conversion, size, and corporate structure.
How does growth affect valuation multiples?
Higher growth increases the multiple.
Why is predictable EBITDA valued more highly?
It improves planning and allows confident borrowing.
What is ‘cash flow conversion’?
The proportion of EBITDA that turns into usable cash after capital reinvestments.
Why do larger companies command higher multiples?
Due to diversified operations, better financing options, and more buyer interest.
How does corporate structure impact valuation?
Pass-through entities are more tax-efficient and sell at higher prices.
What is adjusted EBITDA?
EBITDA adjusted for non-recurring, personal, or unusual expenses and revenues.
Why is adjusting EBITDA important?
It ensures the earnings figure reflects future operating performance under new ownership.
What is the risk of seller-provided add-backs?
Sellers may exaggerate personal expenses or adjust salaries unrealistically.
Why must you evaluate the sustainability of historical EBITDA?
Because the valuation assumes earnings will continue, and this may not always be true.
What is seller debt?
Part of the purchase price paid to the seller over time rather than upfront.
How does seller debt affect valuation?
It can allow for a higher multiple than an all-cash deal due to increased seller risk.
What does a 4x EBITDA purchase price imply about returns?
It provides a 25% yield before financing or adjustments.
What is the typical annual return equity investors expect in small firms?
Around 25%.
What is the exit multiple in financial modeling?
The assumed multiple at which the company will be sold in the future.
Should your exit multiple be higher than your acquisition multiple?
No; it’s safer to assume the same or a lower multiple.
What role does a financial model play in setting offer price?
It projects returns under various scenarios to determine viability.
What is an Indication of Interest (IOI)?
A non-binding letter stating the buyer’s intended offer price and basic terms.
Why issue an IOI before confirmatory due diligence?
To ensure pricing alignment before investing more effort in the deal.
