Short Answer – Never
Long Answer – Below
When I started my career there was a multitude of theoretical models to value a company including:
- Income Approach including Discounted Cash Flow
- Market Approach based on similar companies or recent sales
- Asset Based Approach including Book Value and Liquidation Value
Today Lower Middle Market transactions are based upon a multiple of EBITDA. It is 5th grade math but behind the numbers is where the all the complexities lie.
What is the correct “adjusted” EBITDA number to predicate the calculation on? This is partial source data and partial subjective negotiation.
What is the correct multiple? This is 100% negotiation. Sure, there are industry/sector ranges that will indicate something such as a range of 4X to 6X. Seems simple EXCEPT 6X is 50% more than 4X. If your company’s adjusted EBITDA is 3,000,000 then the purchase price range would be from 12,000,000 to 18,000,000 based upon that one single digit number.
Suggestion – secure a high-quality advisor to achieve the higher end of possible sales prices.
So, what asking price should be listed if the range is 12,000,000 to 18,000,000?
- List 12,000,000 and potentially leave 6,000,000 on the table?
- List 18,000,000 and scare aware 90% of the buyers?
- List 15,000,000 knowing you will have to negotiate down some and end up at 13,500,000?
Hopefully you can quickly see that none of those options are a good option.
I never ever list an asking price. Instead, I go to great lengths to articulate the true value of the company through the listings and offering materials.
About 20% of the buyers grumble and complain. They say that I am asking them to “bid against themselves” or I am asking them to “bid in the dark”
I professionally explain to them that is not the case.
I encourage them to learn everything that they can about the business. I assure them that I will make sure they are fully informed and in a position to make a good decision.
Then I suggest that they determine what the value of the business is to them and bid that amount in good faith.
Ever since Covid offers have been coming in plus or minus 40% from the midpoint. That is too big of a range to publish an asking price.
Remember – listen to the market - it is not what your company is worth – it is what it is worth to a single buyer!