In this video Richard C. Wilson discusses what can kill lower mid-market deals. Not basing your valuation on EBIDTA numbers can quickly kill lower mid-market deals. If you have any questions about these types of deals please email me at [email protected]
Hello, this is Richard Wilson. I'm coming to you from Malaysia today. I'm actually here in Kuala Lumpur to speak at a family office conference and meet with a few potential clients. I wanted to talk to you real quick about what kills lower middle market deals. I've been working on a lot of direct investment, co-investment activity on behalf of our buy side clients. There's a few things that keep coming up that just absolutely kill deals very quickly. It's in nobody's best interest that these things happen. It's not good for my firm. It's not good for my clients who are trying to acquire these businesses or provide them with growth capital. And it's obviously not good for that family business founder, that multigenerational business owner who is trying to create a liquidity event or sell his business or grow it faster.
Here are the things that quickly kill lower middle market deals. One is basing your valuation on a multiple of revenue, on something based on IP or technology instead of basing it on your EBITDA numbers. In other words, if you tried to say, "Well, we're doing 5 million in revenue, and I see that there's $100 million a year in revenue company got valued at a two times multiple of their revenue." Well that's not relevant because first of all you are not at $100 million a year. And second of all, anything that's less than 50 or $100 million a year, is almost always going to be an EBITDA multiple, especially if you're working with family offices. They don't have to allocate all their capital like a pension fund, endowment fund, or private equity fund might feel pressured to. They can wait for great deals so they're not going to overspend.
Of all the clients we represent, nobody is looking to spend more than seven times, maybe once over 10 years, eight or nine times EBITDA. But really the three to seven times EBITDA is the range, and the larger your business, more professionalized, more systematic, the more that the current CEO founder isn't needed to run it day to day, then the higher multiple you deserve as a business owner. The industry, the life cycle of a business, how competitive the environment is, how stable those earnings will be going forward all change what the multiple could be.
Now let's get back to other things that kill deals. We've had multiple deals killed because of excess debt. The first deal we started working on was killed because of off balance sheet holding company activities or third party holding companies that the CEO is compensating himself through. The valuation was already high, and then once it was uncovered that he was compensated himself through some third party entities, we had to walk away, and our broker dealer and I just decided it just wasn't worth working with an organization like that because we couldn't trust what else was going on since that wasn't really disclosed up front.
And a lot of the time, deals breaking come down to not trusting the team or not trusting the financials, which gets to my next two points, which are just a completely disorganized business in terms of financial systems or just operational systems. If you can't trust that the EBITDA and the revenue will still be there the next year without that CEO working 60 hours a week, then it's a nice craftsman business, but it's all in their head. It's not really something that can be managed and grown institutionally, at least not very easily from where it is now. It can bring down that multiple by a third or a half sometimes. If the financials are all out of mess, you can't trust what the CEO tells you.
This content was produced by the Family Office Club, to learn more about downloading our free book on ultra-wealthy investors and investing, to explore membership, or see when our next live events are please visit http://FamilyOffices.com If you are interested in setting up a family office solution, or getting better direct investment deal flow through our Centimillionaire Advisors, LLC division please visit http://Centimillionaires.com
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Richard C. Wilson is the founder of the Family Office Club, the #1 largest community of registered ultra-wealthy families and family offices with 1,750+ registered investors and 20+ live events a year. To download a free book on the family office industry please visit: https://familyoffices.com/family-offi... and if you need help investing or setting up your family office please see our Centimillionaire Advisors, LLC website at http://Centimillionaires.com
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