You recall our discussions about how to value companies for acquisitions? You seemed to think that the proper methodology was a multiple of sales, I and another poster said it was 5-7 times EBITDA. Our company just finished a project to advise a well known private equity firm on the purchase of an auto supplier.
We discovered some unwarranted optimism in the target's business plan so our clients bid 4.72 x EBITDA. A different PE firm obviously did not see the flaw and bid 5.25 x EBITDA and was chosen to close the deal. The winning bid was 1.2 x sales revenue. I would hardly call that a 'multiple'.
as you know i did a little research after my valuation comment hit the fan with justsum. the question was how to quickly value a private company with $200MM in revenue and having profitability problems. (by quickly, justsum said it could be done in 30 minutes)
since valuing and selling companies is not my area of expertise, i winged the answer with something i recalled from grad school. it should of been ebitda but i used sales instead- you can't edit the original message once the post button is hit. so the fun began.
in doing the research after the comment was posted, i learned something. the definition of a "small business". using sales to value a small company can be a useful starting point when valuing a small business. (especially if justsum is running it!)
apparently, a private company in the automotive supply business with 1,500 employees can be classified as a small business (via sba guidelines). a 1,500 employee company could have sales in the $200MM range and therefore, could be valued using the stanford article method.
that trumped justsum's very definite "no one in the world would use sales to value a company" comment. also, one could argue that using ebitda would not be appropriate if the company was not profitable.
thank you for your note and if i were running gm today i would be building vehicles that people longed for, not rental car fleet units! Rear wheel drive, responsive, keeps value over time, etc. so the hell with ebitda until the market share comes back!
Did you think that this was a good time to buy out a auto supplier? It seems to me that a good time
to buy would be during a serious recession, although I will admit that it is very hard to buy when
everything is so discouraging.
"Did you think that this was a good time to buy out a auto supplier?"
It really depends on what your objective is. In this case, our clients were looking for something with consistent cash flow and this company was perfect. Maybe not so much upside on the exit pricing, but even PE companies need cash flow to sustain themselves. This particular company had a very aggressive 2014-17 business plan and I'm sure they were figuring on getting a premium for that. It was overly aggressive in our opinion, so we didn't put the premium in our bid.