Inside the Deal | Selling Upstream

In today’s market, many big firms are only interested in acquiring businesses with at least five million dollars in earnings before interest, taxes, depreciation, and amortization (EBITDA). Many opportunities fall a bit short of the $5M EBITDA mark although this doesn’t mean that investors shouldn’t take a harder look. Here, we’ll go inside the deal and talk about what happens when these opportunities come to market.

One strategy the Symmetrical team utilizes in making this work is to look for similar or complimentary businesses that are also looking for an exit and package the opportunities together. For larger buyers, the opportunity of two or three integrated businesses that offer complimentary services while combining to meet the $5M EBITDA mark is very intriguing.

Once the companies are packaged together under one centralized brand, approximately 3-7 years later the investor will resell this investment to a national company at a higher price.

Let’s take this hypothetical example: 

Companies A and B have a combined market value of $25 million ($5M EBITDA at a five times multiple). Leveraging the companies’ synergies, enhancing efficiencies, and growing organically; a buyer may be able to add another $3 million in EBITDA over their hold period.

The combined business has $8M in EBITDA, making it more attractive to another Private Equity Group or a larger strategic acquirer that could pay a higher multiple. To the national company, the opportunity could be valued at $48M ($8M EBITDA at a six times multiple – or even more).

For this example, let’s say the private equity firm structuring the initial $25M transaction used $10M in equity and $15M in debt. With an initial $10M in equity, the $48M sale is nearly five times ROE.

For sellers, it’s helpful for you to know from the onset whether your company will be part of such an arbitrage package. If so, you can plan accordingly and negotiate your best possible price and structure. If you assume that the platform company’s resources and leadership will increase NewCo’s valuation, this might be the perfect opportunity for you to roll over equity into the new firm and create a return that is unquestionably over and above the normal returns that you could expect to receive in the public markets.