Know the potential impact long before you attempt to sell
When you look to sell your company one day, an acquirer will look to place an exit multiple on your profitability to determine the valuation they should pay you. Every industry plays within a range of this exit multiple and the ranges change over time. We always say to business owners, you can’t change the range of exit multiple an industry is serving up, but you very much have control over where in the range an acquirer will place you.
For companies that have a single type business and business model, an acquirer will generally place a single exit multiple on the profitability of the business (i.e.: your adjusted 12 month EBITDA). But where it gets tricky is if your company is comprised of multiple types of businesses. In these instances, the acquirer will place one exit multiple on one of your businesses and another on the other, leaving you with what’s called a blended exit multiple.
Quick example – an owner had a specialty polymer engineering company and a metal die casting business. Although this owner saw them as his single company, an acquirer viewed them as two different businesses. The polymer business at sale commanded a 10x exit multiple on the profitability of that business, but on the metal die casting business they applied only a 4x. When the acquirer’s offer came in, the blended multiple (based on the weighting of the profitability of each business) came in at a 6.5x. This shocked the seller as he was expecting closer to the 10x for everything.
So ask yourself, when I look to sell one day, will an acquirer view my company as a single business or will they see multiple businesses and therefore apply a blended multiple? This isn’t something you want to learn when you’re in the heat of the sale. You’ll want to know this well ahead of time as you’ll have more options for addressing it then you will if you wait until it’s time to exit. Call us (949.874.0787) and we can help you determine if your company might experience this issue in the future.
