It's Official -- Your Company Is Worth Less

&l;span style=&q;font-weight: 400&q;&g;Whether we are talking about a Fortune 500 company or a middle market enterprise or a main street business, most financial analysts will say there are three fundamental forces that affect a firm&a;rsquo;s value: 1) what&a;rsquo;s happening with the market as a whole, 2) what&a;rsquo;s happening with a specific industry, and 3) what&a;rsquo;s happening with the specific company.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;In our column, we&a;rsquo;ve harped on the last two. &a;nbsp;We&a;rsquo;ve told you that you need to understand what the average company in your industry looks like and what the &a;ldquo;USDA Prime&a;rdquo; company in your industry looks like. &a;nbsp;We&a;rsquo;ve told you that you need to understand how your firm will be seen by the &a;ldquo;USDA Prime&a;rdquo; buyer -- there are eight disciplines within a business that will be examined during due diligence.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;Turning to the marketplace as a whole, a while back, we talked about a valuation market cycle that affects the middle market. &a;nbsp;And, we said that valuations would likely peak and then turn in 2018. Well, it appears that this might have started.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;As a matter of reference, according to one data provider, middle market firms being purchased by private equity funds over the past 15 or so years have seen these average multiples:&l;/span&g;

&l;div class=&q;table-wrapper&q;&g;&l;table&g;&l;tbody&g;&l;tr&g;&l;td&g;&l;span style=&q;font-weight: 400&q;&g;Revenue&l;/span&g;&l;/td&g; &l;td&g;&l;span style=&q;font-weight: 400&q;&g;EBITDA Multiple&l;/span&g;&l;/td&g; &l;/tr&g;&l;tr&g;&l;td&g;&l;span style=&q;font-weight: 400&q;&g;$10 to $25 million&l;/span&g;&l;/td&g; &l;td&g;&l;span style=&q;font-weight: 400&q;&g;5.6X&l;/span&g;&l;/td&g; &l;/tr&g;&l;tr&g;&l;td&g;&l;span style=&q;font-weight: 400&q;&g;$25 to $50 million&l;/span&g;&l;/td&g; &l;td&g;&l;span style=&q;font-weight: 400&q;&g;6.3X&l;/span&g;&l;/td&g; &l;/tr&g;&l;tr&g;&l;td&g;&l;span style=&q;font-weight: 400&q;&g;$50 to $100 million&l;/span&g;&l;/td&g; &l;td&g;&l;span style=&q;font-weight: 400&q;&g;7.2X&l;/span&g;&l;/td&g; &l;/tr&g;&l;tr&g;&l;td&g;&l;span style=&q;font-weight: 400&q;&g;$100 to $250 million&l;/span&g;&l;/td&g; &l;td&g;&l;span style=&q;font-weight: 400&q;&g;8.0X&l;/span&g;&l;/td&g; &l;/tr&g;&l;/tbody&g;&l;/table&g;&l;/div&g;&l;span style=&q;font-weight: 400&q;&g;

As an aside, we&a;rsquo;ve suggested to you that one way to bump your own multiple was to acquire another firm. &a;nbsp;For example, your $20 million revenue company might achieve a multiple of 5.6 times EBITDA. Acquire another firm with the same revenue for the same multiple. &a;nbsp;The combined business of $40 million revenue will be valued at 6.3 times EBITDA -- expanding the multiple of both your unit and the acquired unit.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;Back on point . . . &l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;Over the past few years, valuation multiples moved up to significant premiums to those mentioned above. &a;nbsp;As it seems with the publicly traded stock market, people think that it is simply going to continue. After all, stocks go to the moon don&a;rsquo;t they? &a;nbsp;(Check out NVDA.) And, when the inevitable correction comes, people get pushed out of shape . . . and the talking heads on the various television networks stir up the fear and (mess) with your emotions.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;As was mentioned above, there is a multi-year valuation cycle with middle market firms and it appeared that 2018 would be a turning point. &a;nbsp;Well, the data is in and it appears that valuation multiples have started to break down. From 2017 to 2018, the average multiple of EBITDA paid for $10 to $25 million revenue firms dropped by a whopping 0.5X. &a;nbsp;That&a;rsquo;s just about a 10 percent decline in prices paid. And, for this range, the multiple is only slightly above its 15-year average. During the same period, firms with revenues of $25 to $100 million held their own. &a;nbsp;But, firms with revenues over $100 million also saw a contraction -- approximately 0.3X EBITDA.&l;/span&g;

&l;span style=&q;font-weight: 400&q;&g;The year 2019 will be interesting to watch to see whether the stutter in 2018 was just an interim correction or is indeed breaking down as part of this long-term cycle. &a;nbsp;Whichever it is, you have the power to counteract it via actions within your firm -- those eight disciplines. You must decide on whether you are going to sell a USDA Prime company or a USDA Select company. &a;nbsp;Be honest with yourself. And, whatever you decide, as Coach Lombardi said, it can&a;rsquo;t be a sometime thing . . . it has to be an all-of-the-time thing. Bo says Just Do It!&l;/span&g;