BY STEVE DINNEN
If you’ve toyed with the notion of selling your business, now might be a good time. A great time, actually, says M&A expert Eric Lohmeier, as selling prices of companies he’s working with are at the highest level he has seen in his career.
Lohmeier is president of NCP Inc., a Des Moines firm that works on merchant banking and business valuations – mainly for sellers. In recent years his firm has worked on deals large and small for the likes of John Deere, Airgas, Claas and Verizon. Their comfort zone is in deals valued between $10 million and $200 million.
With the economy showing sustained signs of durability, Lohmeier said valuations for these transactions are topping those last seen in 2007. And it’s all because EBITDA is expanding and being calculated more expertly.
There are several ways to value a business – discounted cash flow, for instance, or the comparable transaction method. But Lohmeier said that corporate America seems pretty well satisfied that annualized earnings of an enterprise before interest, taxes, depreciation and amortization – EBITDA – is a solid tool to gauge its worth.
Over the past few years a selling business might have fetched five to maybe seven times annual EBITDA, said Lohmeier. With the economy still in high gear, and corporate tax rates trimmed, that EBITDA yardstick has bumped up to a solid seven-eight and is sometimes as high as 10.
“We’re at all-time highs with multipliers,” said Lohmeier . “We’re in the stratosphere right now.”
In addition to a rise in EBITDA because of a better economic conditions, Lohmeier said business valuations also have increased as his firm has been able to delve into the quality of the earnings that are being used. For instance, he said a firm might have an airplane that it uses to shuttle executives around; something a new owner would not need or want and therefore could exclude from the expense ledger. Also liable for a cut would be executive or IT staffers whose expenses could be trimmed as their duties are shifted to the acquirer’s staff.
Lohmeier’s job, then, is to establish a really good base for EBITDA. And to hang onto it as long as is possible. After all, these valuations were impossible to come near to in the dark days of 2008-09. And he said business owners should realize current sales prices are not sustainable. No one knows quite when the economy will soften and those EBITDA numbers will tumble. Until then, though, it’s a seller’s market.