When a company is acquired for a multiple of EBITDA (say it’s 6X), it means a company that makes $5 million in EBITDA would achieve a $30 million value (6X $5 million=$30 million). Upon getting an offer of 6X, some business owners ask themselves: “6X? Well, why don’t I just work for six more years and make that money myself?”
In M&A parlance, every “X” is a “turn.” If your investment banker can move an offer from 6X EBITDA to 7X, that is “one turn.” Moving “half a turn” means going from 6X to 6.5X. Each turn represents a year of the current EBITDA, assuming the company doesn’t grow (or shrink) along the way.
Say you’re at $5 million EBITDA. If an acquirer purchases your company for a (hypothetical, impossibly low) 1X EBITDA, or $5 million in purchase price, it would take the acquirer just one year to make back the acquisition cost. A 2X transaction—a $10 million purchase price—means acquirers would make their costs back in two years, all things being equal.
You will invariably read of a company that got acquired for 25X or 30X EBITDA, invariably high-tech companies. The acquirer would need 25 or 30 years of “steady state” EBITDA to earn back what they paid. These acquirers are banking on exponential growth to justify that multiple, or they see a meaningful accretion to their market value when the new acquisition is added, e.g. Salesforce buys another big CRM system and absorbs their customers, so the new combined earnings trade at a higher multiple than what the acquired company would trade for as a stand-alone.
The LBM sector is meaningfully different. Company growth is steady and predictable, driven by the principle that demographics are destiny. Therefore, 25X and 30X multiples are entirely unrealistic. Yes, LBM companies in higher growth areas trade for higher values, but the building industry’s inherent volatility is priced into every purchase price, whether it’s 3X or 7X. And everyone has clear memories of the 2008 real estate crash, the COVID-19 lumber price spike, inflation trends, 10-year T-bill yields, and interest rate patterns. Still, nearly always, when a prospect of ours is offered a certain multiple from an acquirer (say it’s 6X) they will ask us to move the acquirer “up a turn,” to 7X. If the acquirer is not open to moving up a full turn, or even a half turn, and the seller/owner has a 7X value in their mind as their bottom line … the seller will make the very common observation cited above: “Well, what if I run it for six more years and make the money myself?”
Of course you can do that.
However, most of our clients are selling because of their age. Their parents or grandparents started the business, and many owners today are approaching their retirement years. Very often, they don’t have children who want the business. So, after someone says, “Why don’t I just run it,” we will point out that every “turn” you are offered for your business is a year of your work life.
If not taking a 6X is a reasonable trade for working for six more years, you are probably not a seller in today’s market. Is not taking a 6X when you will take only a 7X really worth six or seven years of your work life? If so, again, you should probably save the trouble of preparing your company to solicit offers.
I almost hate to do the math for you, but say you’re 73, and you turn down a 6X because you’re dug in on getting a 7X. You will have to work until you are 79 or 80 to achieve what you would have gotten in a purchase price. Beyond that, a central deal element for most acquirers is to require leadership continuity, and it’s a value detriment when a seller clearly has one foot out the door. In fact, that often leads acquirers to “price in” the cost and volatility of grooming new leadership once they take control.
The best approach in our view? Be realistic about your acquisition value—our team can tell you to the dollar what your acquisition value is today—and don’t go to market so late in your work life that you are viewed as a liability to growth, or a human resource that’s so ready to retire that you will need to be immediately replaced.
