What Is Your Company Worth? Looking at EBITDA Multiples
Periodically, this is one of those things that executives in startup companies should think about: What are the current multiples on revenues and EBITDA in my industry and my niche?
These days, of course, this is one of those “cover your eyes, you don’t want to know” times in the market. But, periodically, you’ve got to look anyway.
If you don’t know what I’m talking about, don’t worry. I’ll explain.
Here’s the very short story on valuation: Professional investment bankers have to put valuations on companies all the time. Every time you raise investment capital, issue stock options or consider an acquisition or divestiture, there has to be a valuation done, which ends up sitting at the heart of the deal.
There are several ways to do valuations, but the most conventional way is to use some multiple of either the company’s revenues or its raw earnings (EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization. Startups with revenues but zero or negative earnings may use some multiple of revenues, but that gets more complicated.)
So, when you want to take a look at the big picture to see how the acquisition and investment market might be performing for your type of company, you look at what kind of valuation multiples of EBITDA are cropping up in reported sales of companies in your niche.
Personally, I like to read the Martin Wolf Securities monthly and quarterly analysis reports. MWS specializes in investment banking for middle market technology companies (my niche). Having had discussions with them in 2008 about one of my companies, I can also note that they are smart and extremely helpful.
Their monthly and quarterly analysis and commentary is useful for executives who need a real-world grounding in recent share values in their industry. This is high-level market analysis, not nitty-gritty “how to build and sell my company” analysis, but critical to understand, nonetheless.
While middle market technology may not be your industry, there is probably a similar report for your industry and it is worth your time to find it and read it periodically.
(The MWS reports are free. They get their raw deal data from Capital IQ. Keep in mind that many, many private deals don’t report numbers… Especially these days, when desperate venture backers and companies are taking a bath on their valuations.)
So, what are they seeing in the middle market technology space these days? In the Martin Wolf Valuations & Insights newsletter, they publish a Scoreboard of recent representative deals. For Q1 2009, we see valuation multiples of 2.5 of EBITDA for offshoring IT support companies (ouch) all the way up to 10.3 for “enterprise application” software companies. You’ll have to look at the report and try to put your company into one of the categories in order for the report to be meaningful to you.
(Hummm… Maybe that multiple is why I start and fund enterprise application companies…)
However, be careful how you read those numbers. Those numbers represent the broadest possible measure, may not apply to your sub-market or company, and certainly only represent a tiny sub-set of all deals, since many deals don’t report their numbers.
(Deals between two private companies, for example, often don’t report numbers to anybody. Public companies acquiring private companies are most likely to influence the index, since they have legal reporting requirements.)
Still, you can see trends by reading this report and following it over time.
It is probably equally important for executives to look at the detailed reporting on recent deals to understand what is happening in the market. Both the monthly and quarterly reports contain interesting deal details and commentary, although very brief. Even the reports without numbers are interesting, however, because of the commentary.
Important questions to ask yourself while reading these deal descriptions: Why was a company acquired? What was the acquirer trying to achieve? What sub-markets are hot right now and why? Are those earnings likely to be sustainable? Scalable? What was the likely return-on-investment for the investors? For the founders?
Learning to read between the lines and do additional research on deals that are especially applicable to your company is important and these kinds of valuation and deal reports are a great place to start.
Of course, maybe what we should all do right now is cover our eyes a little while longer and get back to work building our ventures! Economic turnaround and growth isn’t going to emerge from the equity and debt markets and leveraged buy-outs, as it did a few years ago.
Instead, growth must emerge from real innovations, real earnings, real jobs, and real money, created by smart entrepreneurs and companies that are doing something much different and much better than their competitors, worldwide.
Everybody back to work!
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