Business Acquisition Protocol
and Business Valuation Matrix

by: Theodore P. Burbank, FCBI

Transaction structure and financial requirements will vary depending upon the size and type company involved.  Businesses can be divided into four classes.  Definition of Earnings, usual Price/Earnings ratios and Terms of Sale vary by classification.

• Wall Street
  Usually Public or very large private companies.
    Earnings:                         Measured in Millions
    Earnings Definition:          After Tax Earnings
    Price/Earnings Ratio:       10x to OMG*
    Usual Terms:                   Cash or equivalents
    * Oh my GOD!

• Middle Market
  Generally Private companies with well defined Corporate structure.
    Earnings:                       $500K to Low Millions
    Earnings Definition:        EBIT , EBIT-D, EBIT-DA to After Tax Earnings
    Price/Earnings Ratio:      3x to 15x
    Usual Terms:
         Down Payment:        Equity of 1 to 2x Earnings to all Cash
         Plus:                         Bank note(s) and owner financing   
  
  Companies that represent a "Strategic Fit" usually will be valued and sold using "Wall Street" protocol. When a strategic reason for purchase is lacking, "Upper Main Street" methods are generally employed.              

• Upper Main Street
  Private companies with Corporate structure developing.  Owner has delegated many functions to others.  
  Earnings:                          Usually under $500K
  Earnings Definition:           Adjusted EBIT or EBIT-DA, Sometimes EBIT and EBIT-D are used                       
  Price/Earnings Ratio:       3x to 7x
  Usual Terms:
         Down Payment:         Equity of 1 to 2x Earnings
         Plus:                          Owner financing - limited bank involvement

• Main Street
  Commonly refered to as "Mom and Pop" businesses.  Owner wears "all the hats."  
  Earnings:                         Usually under $100K
  Earnings Definition:          Discretionary Earnings            
  Price/Earnings Ratio:       1x to 4x
  Usual Terms:
         Down Payment:        80% to 120% of Earnings 
         Plus:                         Owner financing - Bank financing is rare

• Definition of Terms:
  EBIT  =  Earnings Before Interest and Taxes
  EBITD = Above plus Depreciation
  EBIT-DA = Above plus non-recurring and discretionary expenses
  Discretionary Earnings = EBIT-DA plus Owner's Compensation

Note: Down payments or equity investments may exceed the levels indicated when inventories and other current asset values are high.

This article has been condensed from "In and Out of Business... Happily."

Mr. Burbank is President of Lighthouse Financial, LLC and since 1979 he and his associates have  consulted with and provided valuation, marketing and sales assistance to more than 2,000 family and private business owners.  He is the author of "In & Out of Business . . . Happily" - "Buying a Business Made Easier" - "VALUware 6.0" Business Valuation Software - "DealMaker 4.0" Business Acquisition Software - "DealMaker docs" Transaction Documentation Software all published by Parker-Nelson Publishing.  In addition he is a contributing author to "Merger and Acquisition Handbook for Small and Mid-Size Businesses" and "Business Valuation Handbook" both published by John Wiley and Sons  and has written many articles on business sales and valuations. He has conducted seminars and addressed many trade associations in the US, Canada and abroad.  Ted is available for private consultation, valuation and acquisition assignments.  He may be reached by telephone: 508 794-1200 or by email: bizval@buysellbiz.com

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