How to Value and Evaluate a Business Acquisition
How to Evaluate the Acquisition of a Manufacturing CompanyJim
Cumbee JD, MBAJune 2015(615) [email protected]
Manufacturing
Company201120122013201420152016Revenue4,7506,0555,9257,0007,7008,500Cost
of Goods Sold2,4253,2253,1453,7004,0004,400Gross
Profit2,3252,8302,7803,3003,7004,100 margin49%47%47%47%48%48%Oper
Expense1,6251,6891,7451,9752,2152,400NOI7001,1411,0351,3251,4851,700Add-backs
Depreciation750525425500500500 Interest304548505050 Gen
Mgr150150150150160160Adjusted NOI1,3301,5611,3581,7251,8752,090
Tier one supplier ISO 9001 certified LT contracts - $10 million
capacity
201120122013201420152016Revenue4,7506,0555,9257,0007,7008,500Adj
NOI1,3301,5611,3581,7251,8752,090Weight10%15%20%55%Total133234272949Weighted
Adj NOI1,588
Based on Revenue & Operating Margins, This Company Would Go
to Market on a Multiple of 4. What Might Drive a Higher
Multiple?Strategic buyer (with clear & present need for your
customers, your assets, your employees, your financials)Be in the
multiple of revenue universeBe an over-achiever companyRevenue
growingpredictablesustainableIndustry/market
growingProfitgrowingimproving margins on growthCompetitive
advantage (IP, licenses, barriers to entry, exclusive deals,
etc)Customer basediversifiedstable/growingrecord of
retentionOrganizationsystems in placesustainableFinancialsquality
recordstimely & accurate tax returnsbank, tax, financial
records reconciled
64
So, What is the Value of This Company?I start with a multiple of
4 because of the company size and profit margins.I then do a
qualitative evaluation, and decide this is an over-achiever company
that justifies a multiple of 6. $1,588 X 6 = $9,500. Working
capital adjustments: Inventory, Acct Receivable Accts Payable
Once You Get a Handle on Valuation, Next Think About Deal
StructureAll cash: when you have a good valuation on a stable
performer with a stable management team, pay cash and get on with
it.
Seller financing: usually only happens when seller is highly
motivated and doesnt have an all-cash offer
Earn out: when you have based on valuation on FUTURE revenue
projection
Partial equity: you need the seller to stay involved &
focused, even if not employed fulltime.
SummaryCalculate a four-year net operating IncomeApply a
10-15-20-55 weighted average to derive weighted-average net
operating incomeApply your baseline multiple to thatEvaluate the
business on the checklist Adjust multiple accordinglyThink about
the win-win deal structure
Jim Cumbee JD, MBA(615) 390-9966 [email protected]
