Determining an appropriate value for your printing company has never been more challenging than it is in today’s economy. While there are numerous reasons to have a company valuation done, they are essential in two situations: when considering the sale or purchase of a printing company, and for estate and gift tax purposes.
Merger and Acquisition (M&A) Transactions
We are seeing two types of valuation structures today for printing M&A transactions:
1) The Traditional or EBIDTA transaction. In this method the value is based on a multiple of his earnings, specifically EBITDA (Earnings Before Interest, Depreciation Taxes and Amortization)
2) The Asset-Based - Tuck In transaction. The seller is paid for the value of the selected assets purchased plus the portion the seller would receive if selling on a tuck-in basis.
In selling your business, it makes sense to use whichever valuation method yields the highest number. If you have a high EBITDA, then you are going to sell based on EBITDA multiple. If you have low EBITDA and higher asset value, then asset-based plus tuck-in value might make more sense.
The Traditional Transaction
The multiple of EBITDA method is universally used to value both printing companies and companies in other industries. This calculation not only provides a good estimate of cash flow, but also removes any distortions that could be prevalent between two companies. It does this by adding back the following: interest expense, which could vary company by company due to different capital structures; taxes, which can vary by the owners choice of the entities tax structure; and depreciation and amortization, which could be due to different depreciation policies.
Once distortions are accounted for, look for items of income or expense that have occurred in your earnings period, often referred to as normalizing adjustments. For example, when we represent the seller in an M&A transaction, we make normalizing EBITDA adjustments for excessive payroll or a family member on the payroll who isn’t actually working, etc. We also make the EBITDA adjustments to normalize the earnings when perks like cars, boats, and vacations are involved.
The primary earnings period used for the EBITDA calculation is generally based on the financials of the company for the last 12 months. Current information is critical in today’s changing market, and buyers no longer want to rely on “average” figures over a long time period. While a three-year or even longer multiple of EBITDA might be appropriate for an estate or gift tax valuation, the M&A buyer is certainly not going to want to pay off a three-year average, particularly if the financials show a declining trend.
So what exactly does the “MULTIPLE” in a multiple of EBITDA represent? The multiples represent your expected return on investment (ROI)—what we call a capitalization rate (cap rate). It is an inverse of your calculated return. For example:
EBITDA of $1M x EBITDA multiple of 4 = $4M Enterprise Value
If you have a multiple of four, your expected ROI is 25 percent. If you use a multiple of five, your ROI is 20 percent. If your multiple is three, your ROI is 33 percent. If the potential buyer has greater concerns regarding the investment, that perceived higher risk will translate to a lower multiple or higher capitalization rate in their offer to purchase your business. Investors have many places they can put their money. Buying a printing company for a high multiple, say six times EBITDA, may not make any sense because it could take six years to recoup their investment; over that period, a lot could go wrong.
The general multiple range for printing companies is three to five times EBITDA, although we have seen a slight uptick as the economy improves and credit markets loosen up. There are numerous factors impacting where your company falls in this range. Generally speaking, the higher the profits, the higher the multiple the buyer is willing to pay. There are also justifying circumstances that might warrant a much higher multiple. This usually happens if the selling company has a niche that is of interest to the buyer.