Latest / The PE Podcast / How Much Will Private Equity Pay for My Business? | Jesse Welch, MidCap Global

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How Much Will Private Equity Pay for My Business? | Jesse Welch, MidCap Global · The PE Podcast

• 0:00
  Joshua Wilson: So, Jesse, I know people have these conversations with you in the world of private equity, these business owners, and they go, Well, exactly how much will you know someone pay for my business?
• 0:10
  Joshua Wilson: Right.
• 0:10
  Joshua Wilson: So, like, what are your thoughts when someone asks that question?
• 0:14
  Jesse Welch: Yeah, well, they're gonna pay less than the LOI says.
• 0:16
  Jesse Welch: So the the headline price is real.
• 0:18
  Jesse Welch: It's not like a fake price, but it's Frankenstein's together from a couple different sources.
• 0:23
  Jesse Welch: I think understanding how they get there is helpful.
• 0:26
  Jesse Welch: So when a private equity buyer or most sophisticated buyers, when they look at your business, they're gonna look at your EBITDA, which is roughly your operating profit, they're gonna multiply it.
• 0:35
  Jesse Welch: And that multiple depends on a few different things: your growth, how big you are, what systems you have in place, how much of your revenue is recurring, whether or not the business is gonna run without you.
• 0:46
  Jesse Welch: And what they do is they test that EBITDA.
• 0:48
  Jesse Welch: So they have accountants and analysts, they do a what's called a quality of earnings or a QOE.
• 0:55
  Jesse Welch: And basically they're gonna make sure that your profit is real.
• 0:59
  Jesse Welch: They're gonna test it.
• 1:00
  Jesse Welch: And every time they reject an ad back, you know, they're trimming a little meat off of your price.
• 1:05
  Jesse Welch: So, for example, if they if they trim a 200K off of that EBITDA and you have a 5x multiple, that's a million dollars that comes off of your price.
• 1:13
  Jesse Welch: And they do that so they don't have to negotiate the price, they just let the math do it.
• 1:17
  Jesse Welch: Then they structure everything up.
• 1:19
  Jesse Welch: I don't really see very many all cash offers under 40 million EBITDA.
• 1:23
  Jesse Welch: The example, I have a business that did just this a while ago.
• 1:28
  Jesse Welch: So they had about $3 million in EBITDA.
• 1:30
  Jesse Welch: They had a 6X multiple, so seems like an $18 million headline.
• 1:35
  Jesse Welch: Well, 20 of that was supposed to roll into the new company as equity, $3.6 million.
• 1:40
  Jesse Welch: So that's money that the owner was only gonna see if the company sold again.
• 1:45
  Jesse Welch: They had a $2 million seller note, which also sat behind the bank note that they had.
• 1:50
  Jesse Welch: They weren't gonna get any of that for five years.
• 1:53
  Jesse Welch: And then there was a $2 million earnout.
• 1:55
  Jesse Welch: And I the earnout was pretty fair.
• 1:58
  Jesse Welch: Those are those are very common.
• 1:59
  Jesse Welch: Um, you know, that only gets paid if the business hits the targets that they set after closing.
• 2:06
  Jesse Welch: So they also had a million dollars that sat in escrow that was held back just in case they found something they didn't like about the business.
• 2:12
  Jesse Welch: So on that particular deal, the wire, the actual cash at closing was $9.4 million, somewhere in that range, which was just over half of that headline number.
• 2:21
  Jesse Welch: And that's pretty common from what I see, unless you have a really, really spectacular business that somebody's desperate to get, like a strategic or something.
• 2:29
  Jesse Welch: 50 to 60% cash at closing is relatively normal.
• 2:32
  Jesse Welch: So when people ask me that question, there's really three things you you want to know.
• 2:35
  Jesse Welch: You got to know what the multiple is attached to your business and who who decided it.
• 2:40
  Jesse Welch: Was it your multiple or was it their multiple after their diligence?
• 2:43
  Jesse Welch: How much cash is it closed?
• 2:45
  Jesse Welch: Because that's the only number you're guaranteed to get.
• 2:47
  Jesse Welch: And then what has to happen in order for you to get the rest?
• 2:50
  Jesse Welch: Because it's it's always hurdles that they're putting in your way.
• 2:53
  Jesse Welch: So how much they broadcast and how much they actually pay at closing can be two very different numbers.