How to determine fair EBITDA multiple for nano-micro cap companies?

Say I am looking into the healthcare space (general for simplicities sake). I find a company I want to acquire and their EBITDA is 10 MM. Now, I can easily pull industry average multiple, but the EBITDA multiple will not correlate well because of the difference in key factors such as risk, competition, position within the market, etc.

Any advice on how to approximate a multiple in a reasonable manner?

Comments (12)

Aug 7, 2017

Find the best comp set you can and apply a discount to it. How do you get a discount rate- sometimes just use the finger-in-the-air method. I've seen this used a number of times and I hate it, but its where valuation becomes more of an art than a science.

Aug 7, 2017

Thank you, I was afraid that was the only thing that could be done.

Best Response
Aug 7, 2017

It won't matter. The company won't sell unless you give them the number they want. Make up a number and start the negotiation.

Aug 7, 2017

Were just trying to find a starting point, but regardless point taken. Thank you for your input, they do not have a sales price in mind yet (they have yet to reach out to brokers/IBs).

Aug 7, 2017

This x100. When we were making pitchbooks on the IB side we had an MD who would stroll by and say "make the football field chart show a valuation window between $[x]MM and $[y]MM." He knew the client and the players in space well enough to know at what multiples a deal would actually happen so for him it was about managing expectations, rather than putting forth what the data are telling you as the answer.

We would then have to cherry pick our comps, precedents, and, to put it lightly, take some "artistic liberties" with our DCF model to make it look like we used some scientific approach to arrive at that figure. Fun times..

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Aug 7, 2017

Alternatively, you could back your way into a number.

Find out where you want to exit at, figure out how much capital you need to invest to get there, and at what return are you looking to get out of the investment. This should give you an entry valuation.

Aug 7, 2017

I really appreciate the advice. This is a great way to approach the situation, will pass along your suggestion. Thank you

Aug 8, 2017

This is the same approach you would use with an lbo model.

Aug 9, 2017
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