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

Joshua Wilson 0:00

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? Right. So, like, what are your thoughts when someone asks that question?

Jesse Welch 0:14

Yeah, well, they're gonna pay less than the LOI says. So the the headline price is real. It's not like a fake price, but it's Frankenstein's together from a couple different sources. I think understanding how they get there is helpful. 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. 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. And what they do is they test that EBITDA. So they have accountants and analysts, they do a what's called a quality of earnings or a QOE. And basically they're gonna make sure that your profit is real. They're gonna test it. And every time they reject an ad back, you know, they're trimming a little meat off of your price. 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. And they do that so they don't have to negotiate the price, they just let the math do it. Then they structure everything up. I don't really see very many all cash offers under 40 million EBITDA. The example, I have a business that did just this a while ago. So they had about $3 million in EBITDA. They had a 6X multiple, so seems like an $18 million headline. Well, 20 of that was supposed to roll into the new company as equity, $3.6 million. So that's money that the owner was only gonna see if the company sold again. They had a $2 million seller note, which also sat behind the bank note that they had. They weren't gonna get any of that for five years. And then there was a $2 million earnout. And I the earnout was pretty fair. Those are those are very common. Um, you know, that only gets paid if the business hits the targets that they set after closing. 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. 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. 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. 50 to 60% cash at closing is relatively normal. So when people ask me that question, there's really three things you you want to know. You got to know what the multiple is attached to your business and who who decided it. Was it your multiple or was it their multiple after their diligence? How much cash is it closed? Because that's the only number you're guaranteed to get. And then what has to happen in order for you to get the rest? Because it's it's always hurdles that they're putting in your way. So how much they broadcast and how much they actually pay at closing can be two very different numbers.