Hi guys:
What would you consider to be reasonable entry multiple for a potential buyout target please? Trying to do some mock practices but want to find something sensible. Would you consider 10x EV/NTM EBITDA to be good please? (roughly 19x P/E in this case) Or would this be too high?
Thanks!
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It depends on the industry that the target is in, which also influences how much lenders would be willing to lever the business. The more leverage you can get, the more you can pay with less incremental equity contribution. Also I don't think I've ever seen anyone credibly ask to lever or pay off of NTM EBITDA. It's usually LTM EBITDA with QoE-vetted pro forma adjustments which are agreed upon across all parties (sellers / buyers / lenders).
With regard to leverage, 50% LTV is a decent rule of thumb, although also highly dependent on the risk profile of the business. If it's riskier then the lender would want to see more equity contribution and a lower LTV at close (e.g., 30% LTV). If it's a pretty sleep at night company then lenders would be more willing to have a higher LTV at close (maybe maxing out at 65% - 70% at the highest end?)
Well if it already has debt then that gives you a good idea as to what the realm of possibility is with regard to leverage. Obviously if it is levered 4.0x - 5.0x already, that indicates that some lender out there was comfortable lending up through that leverage point.
Most transactions are structured as cash-free / debt-free transactions. So the purchase price (inclusive of new debt and new equity) has to be high enough to take out both the existing debt and the existing equity of the business. In this scenario, you'd just re-lever the business probably in the 4.0x - 5.0x range again and plug the rest of the purchase multiple with new equity.
Something to consider is making sure that the Company's FCF can support the debt load and cover the interest payments / amort / capex costs (i.e., making sure the FCCR remains above 1.0x).
The other big factor that hasn't been discussed much = multiple expansion as EBITDA grows.
A co with $1M EBITDA will generally sell for a much much lower multiple than a co with $20M in EBITDA.
Industry is big too, like the others said, stuff like SaaS is red hot right now and can go at insane multiples. Lenders have a hard on for SaaS too right now which will bite them in the ass sooner than later :)