Distressed (Early) Tech Buyout - Revenue vs. EBITDA multiple-basis for entry vs. exit valuation
Hi monkeys,
I'm sure this topic has been discussed a number of times, but prepping for a case study for an early "distressed" tech buyout shop (focus is on acquiring c.$10-30m revenue businesses (c. $10-60m EV; no debt used to finance buyout) which are primarily unprofitable and then flipping once EBITDA-positive)
Given negative EBITDA, entry multiple has to be based on Revenue (assuming 2-3x deflated multiple at entry and 50-100% ownership) vs. likely based on EBITDA at exit (unlikely to reach past 10% EBITDA margin at exit) - curious to hear perspectives on the relationship between these two to model out a realistic returns calc (and not massively inflating EV based on a rev-multiple).
Any help is massively appreciated. Thanks in advance!
Which kind of tech and business model? If an asset-light tech company is distressed it usually means it has lost its product-market fit or competitive advantage, i.e. it's a shitco. Operational improvement aimed at margin expansion isn't super relevant if you can't grow revenue.
Fairly agnostic across tech (mainly software) - worth clarifying it’s not a truly “distressed” strategy (I.e. not debt focused), more taking under-performers (think 10-20% Rev growth and not 30/40%+) with a value investing approach and gearing them towards being profitable to sell on
Under-performers or simply mature software companies? Can't grow 30% forever especially if operating in a limited TAM...
To respond to your question, you can do the entire model based on an EV/ARR multiple at entry and exit, although EV/Gross Profit or EV/FCF (for more mature companies) is also possible.
Thanks for this - it’s only “under-performers” as only targeting companies with max $30m rev (guess the challenging part as you point out is finding companies which don’t have a deteriorating product etc to make it “easier” to turnaround).
To double down on the EV/ARR point, is it not best practice then to base entry on EV/ARR and then exit on EV/EBITDA, even if profitable at exit? Guess the consistency of keeping it to EV/ARR for both entry & exit makes sense, I’m also curious from the perspective of a buyer if they aim to undercut the EV by basing a purchase on EV/EBITDA when profitable at sale and therefore balancing this in the negotation (FYI I’m a consultant so curious to any insight here)
To be fair in any exit situation both parties (seller and buyer) would value the asset by using multiple methodologies, it's not like you can "force" a potential buyer to specifically use EV/ARR or EV/EBITDA - at the end of the day it's the EV amount itself that is the matter of the negotiation, the multiples are just used to do a sanity check vs. what the peers are trading at and what you previously paid.
In practice you could of course assume in your LBO model an entry based on EV/ARR and an exit based on EV/EBITDA, but you would have to make 2 assumptions instead of one - usually, LBO models do not assume multiple expansion so you would assume that your entry EV/ARR is equal to your exit EV/ARR.
I'm also interested in this field. Mind sharing players in the distressed tech buyout space?
Bump
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