20x EBITDA Strategic Acquisition
- February 24, 2022
- Posted by: Gaston Reeder
- Categories: Business plans, Finance & accounting, Uncategorized
20x EBITDA Strategic Acquisition
If you ask most M&A advisors, CVA’s, or private equity folks what a manufacturing company with under $5m in revenue will trade for, you’ll likely hear ranges of multiples from 2 to 4.
If you then disclose that the company has under $100,000 in total earnings; you’ll likely discuss trading the business based on the balance sheet due to the benefit stream being worth very little in the first place.
So how do you get 20x earnings?
Most of the time, procuring a purchase price equal to 20x EBITDA for a small manufacturing company would be considered impossible.
Several years ago, a small company manufacturing orthopedic braces for women with carpal tunnel syndrome approached us with the intent to sell. The owner, let’s call her Debbie for confidentiality purposes, had met with several other M&A firms and brokers only to be turned down by each one.
“The business can’t be sold,” they said. “You should liquidate and that is not a service we offer” others chimed in.
Debbie was devastated.
Twenty-five years of her life building out her product line. Employees that were like family members at this point. And health issues that would make it impossible to continue operating the business.
Problem thinking...
The problem with these M&A advisors is that they only looked at the company from an earnings standpoint which obviously was not exciting. They missed the reason Debbie’s earnings were so low; she was always reinvesting in the company – R&D, new channels of distribution, employee compensation, etc. She was on a mission to grow a reputable and solid brand that would last in the competitive medical marketplace.
They also missed that she was in CVS, Walgreens, Target, and quite a few other big-box retailers. They missed the fact that consumers who used her product found it incredibly helpful and she had significant brand loyalty. And finally, they missed the fact that this business could, should, and would be sold for the significant goodwill value that it had built over the decades.
Strategic Advisors
When we met with Debbie and decided to try to help her, we discovered these facts about the business.
Led by our CEO Keith Campbell, our team restructured Debbie’s financials and created an offering memorandum showing the benefit stream not as the EBITDA but as the adjusted gross profit margin.
We understood that this business could never be sold as a standalone operation.
This business needed to be sold and absorbed by a larger company that could move operations and manufacturing into an existing operation; therefore, eliminating fixed overhead expenses incurred with running the business as a standalone operation.
A strategic bolt-on
Follow me here… if a larger company buys a smaller company and moves the operation into its own facilities – what expenses go away? Lease, utilities, insurance, etc. And which ones are reduced? Office supplies, equipment costs, professional services…
The bottom line is that the real benefit stream the buyer inherited post-closing was not the earnings or EBITDA but the adjusted gross profit margin.
With a team of top-notch financial analysts, we can model what the company looks like inside of the buyer’s operation and come up with a reasonable cost analysis – this is exactly what we did.
Our team did not even bother talking to individuals or buyers seeking to keep the business in place as a standalone.
Instead, we searched for other medical companies manufacturing therapeutic related products that were at least 4x larger than Debbie’s company.
Within 6 months we found just the right buyer. A growing company manufacturing braces for sports injuries that was seeking access into the big box retailers that Debbie was already in. The cross-selling opportunity was enormous, and the fit was perfect.
After a short round of negotiations and a brief due diligence period, Debbie sold her company for 20x earnings.
Closing thoughts
When you’re seeking an advisor to represent your life’s work. Look for the people that see your organization’s true value and are willing to think creatively and act strategically.
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Exodus delivered on what they said they were going to do in our first meetings. It was a pleasure working with their team to sell my company. They are truly experts in aerospace/defense manufacturing.
