Have You Sanity-Checked the Valuation Multiple?

I’m talking about the valuation multiple on the company you think you’d like to acquire.

 

Several months back I was talking the owner of a company, one of my client’s acquisition targets, about valuation. The conversation was similar to one I’ve had many times. He felt that his company was worth 7x trailing twelve months operating income, or based on my best estimate, about 5.6x EBITDA which is on the high side for an industry that is seeing similar transactions in the range of 4-5x EBITDA. His rational was that the company, at about $15 million in revenue, was achieving 20% operating margins–he suggested that I go try to make that kind of profit in the stock market. He also indicated that there had been offers in the past that were south of 7x operating income, and he felt he could do better.

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