Owners of growing companies often get approached by prospective buyers, even when they are not looking to sell. Suddenly, they are faced with a leveraged buyout from a single buyer. But owners that engage in those discussions, often face a challenge as the talks intensify. The challenge is they are talking to a single potential buyer, so they can’t use competition (i.e. interest from multiple bidders) as a way to drive up the Company’s price during negotiation.
One way to create leverage in those situations (leveraged buyout single buyer) is by proactively providing the buyer a multi-year financial projection. Most buyers only ask for historical financials, but proactively providing projections can help in two ways:
- One, if the Company is growing year over year, it allows the seller to demonstrate that continued growth is very likely and should be factored into the valuation.
- Second, if the seller is trying to realize a certain target value for the business, the seller can use multi-year projections to illustrate that the Company is on track to meet or exceed the seller’s target valuation* within the next couple of years. This allows the seller to say “I am not selling until I reach my target value even if it takes me a few years.” Now the buyer must decide if they are willing to meet the seller’s target price or walk away.
As an example, I was recently working with client looking to buy a business that was growing about 20% per year and generating over $3M in EBITDA. The company also had significant backlog and the owner had a target company valuation of 10 times (X) forecasted year end EBITDA (a very high price compared to most businesses). We were in the process of reviewing the financials when my client got a call from the seller saying another unsolicited offer came in at his target price and he was taking their offer. The seller was able to sell at the premium 10X EBITDA value because he was driving growth, illustrated that in his projections and clearly articulated his value and his path to reach it within the next three years.
So if you get approached to sell your company, and are realizing strong growth, make sure to put together quality financial projections to use as leverage to drive up price. It may help you get the value you want for your business!
(*Company value for private businesses is typically based on a some multiple of EBITDA. Sellers must then project forward EBITDA which can then be used to make assumptions about the likely future value given a multiple or range of multiples applied to EBITDA).
Topic: Leveraged Buyout Single Buyer Corporate Financial Consulting
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