It’s like clockwork. Whenever someone calls me about selling their company, they respond to my spiel with the exact same question: “What’s my business worth?”
My answer is always the same but never the one they expect: “It depends.”
There is no magic formula for determining the price of a business. In fact, what a buyer eventually pays has zero correlation to the estimated pre-sale value. Everything depends on what someone will pay for it.
Many different methods are used to value enterprises. The one favored in the transportation industry involves applying a multiplier to normalized EBITDA (earnings before interest, taxes, depreciation, and amortization).
In the simplest terms, think of EBITDA as your company’s earnings after your 72-foot yacht is taken off the books and your accountant applies some formulas you don’t understand. It is what it is and will show the world what type of business you’ve been running the past five years. There’s very little negotiating when it comes to your normalized EBITDA.
The multiplier is a different story.
Think of the multiplier as the neighborhood in which you live. The market determines the price of the houses: bigger, fancier abodes sell at the top of the price range while old, unkempt tear-downs sell near the bottom. Your final sales price will depend on whether you built a mansion or an outhouse.
Of course, one man’s shack is another man’s castle. If you’re thinking of selling your transportation company, be prepared to fight for and defend your multiplier. Here’s where I would focus when you negotiate:
I’ve never known a company that absolutely had to make an acquisition, but every day I speak with owners whose only option is to sell. Far too often the circumstances — not planning — dictate that a deal must get done. When you stop negotiating and start asking, you lose your negotiating power. Asking is no way to get into the multiplier high-rent district.
If your potential buyer bought five companies last year, it probably looked at hundreds of deals. On the other hand, if you’ve been moving freight all your life you probably don’t have a clue how to sell your company. Loading up your team with a seasoned group of M&A 50-goal scorers is painfully expensive. However, it’s worth every penny because it gives you the best chance of getting a higher multiplier once the puck starts moving. The mere fact you have them on your team sends a strong message that you’re serious and won’t get pushed around.
When a potential buyer can see that it can leverage synergies between your two companies, it’s usually willing to pay a higher multiplier. Using that to your advantage will depend on how much the buyer is willing to share its long-term plans with you. Often, buyers are closed-lipped, fearing that you’ll get an advantage if you know their next steps. That’s when you need to draw on your industry experience to try and figure out their anticipated savings. The more you can uncover about their intentions, the more negotiating power you’ll have to drive the number up.
One challenge every purchaser faces is figuring out how to sustain the long-term value of your company. Most of this discussion will focus on the size and make-up of your customer base. “Bigger” is better in more than naughty films. Buyers perceive larger companies as being less risky. They not only attract more interest, they also get higher multipliers. Relying on a small handful of customers who are also golfing buddies will cost you money. Buyers will drool if you have a large base of repeat, dependable customers in a growing sector of the industry.
The multiplier will depend on the terms of payment and the tax structure you negotiate. Getting most of the cash up front sounds like a great idea but will reduce the price. Companies will pay higher multipliers when they can distribute the proceeds over time, making portions of it contingent on the performance of your former company. Too many owners balk at earn-out options before considering all of the ramifications, including the restrictions in the non-compete agreements they’ll be signing.
I always tell people it’s probably best not to ask a question if they think they won’t like the answer. Considering the look on their faces when they ask me what their business is worth, I might start suggesting they put on some Depends before they ask that question.
Mike McCarron was one of the founding “M”s in MSM Transportation before the company was purchased by the Wheels Group. Based in Toronto, he currently works for Wheels in mergers and acquisitions and can be reached at email@example.com. Follow Mike on Twitter @AceMcC.
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