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Why List Price Multiples Don’t Matter as Much as You Think
Joe Valley is the Co-owner and Director of Brokerage Services at Quiet Light Brokerage, a business advisory firm that helps online entrepreneurs achieve amazing exits. Joe joined the firm after selling his own e-commerce business through Quiet Light Brokerage in 2010. He has advisor expertise in all web-based niches, including SaaS, e-commerce, and content businesses.
In addition to being a frequent speaker and podcast guest himself, Joe is also the co-host of the Quiet Light Podcast.
Mark Daoust is the Founder, President, and CEO of Quiet Light Brokerage. Since starting Quiet Light Brokerage in 2007, Mark has guided dozens of entrepreneurs and small business owners through their exits.
Before his work at Quiet Light Brokerage, Mark founded Site-Reference.com, an online publication with a subscriber base that he expanded to more than 220,000 members. Now, Mark is a well-known presenter and guest author, as well as the co-host of the Quiet Light Podcast.
Here’s a glimpse of what you’ll learn:
- Mark Daoust reveals why multiples aren’t the most accurate measurement of your business’ value
- What is the purpose of a multiple from a buyer’s perspective?
- How to calculate multiples—and why they are inconsistent at different brokerage firms
- How growth projections factor into the calculation of multiples
- Real-life examples about why multiples can be deceptive
- Joe Valley’s advice to prospective sellers: set an exit goal and reverse engineer your way forward
In this episode…
As a prospective seller, you want to build as much value as possible into your business before you exit. However, one of the most common strategies sellers utilize to establish their business’ value or reputation can actually be totally ineffective: list price multiples.
Many buyers or sellers are obsessed with multiples. But, are multiples really the most accurate calculator of your business’ value? According to Mark Daoust and Joe Valley, multiples are incredibly complex and can often be a deceptive measurement for both buyers and sellers. So, how can you navigate the messy world of multiples as you attempt to create a well-documented, transferable business?
In this episode of the Quiet Light Podcast, co-hosts Mark Daoust and Joe Valley sit down to discuss why list price multiples aren’t as accurate or important as most buyers and sellers think. Listen in as Mark and Joe discuss the reality of multiples and share more effective methods for demonstrating and transferring value. They also illustrate how you can build, buy, or sell an incredible business without losing blood, sweat, and tears over your multiples. Stay tuned!
Resources Mentioned in this episode
- Mark Daoust
- Joe Valley
- Quiet Light Brokerage
- Quiet Light Podcast on iTunes
- Quiet Light Podcast email: [email protected]
- “Selling Ecommerce Businesses: 3 Levels of Add Backs that Affect Value”
- Jason Yelowitz
- Blue Ribbon Mastermind
Sponsor for this episode…
This episode is brought to you by Quiet Light Brokerage, a brokerage firm that wants to help you successfully sell your online business.
There is no wrong reason for selling your business. However, there is a right time and a right way. The team of leading entrepreneurs at Quiet Light Brokerage wants to help you discover the right time and strategy for selling your business. By providing trustworthy advice, effective strategies, and honest valuations, your Quiet Light advisor isn’t your every-day broker—they’re your partner and friend through every phase of the exit planning process.
If you’re new to the prospect of buying and selling, Quiet Light Brokerage is here to support you. Their plethora of top-notch resources will provide everything you need to know about when and how to buy or sell an online business. Quiet Light offers high-quality videos, articles, podcasts, and guides to help you make the best decision for your online business.
Not sure what your business is really worth? No worries. Quiet Light Brokerage offers a free valuation and marketplace-ready assessment on their website, quietlight.com. That’s right—this quick, easy, and free valuation has no strings attached. Knowing the true value of your business has never been easier!
What are you waiting for? Quiet Light Brokerage is offering the best experience, strategies, and advice to make your exit successful. To learn more, go to quietlight.com, email [email protected], or call 800.746.5034 today.
Hi, folks, it’s the Quiet Light Podcast where we share relentlessly honest insights, actionable tips, and entrepreneurial stories that will help founders identify and reach their goals.
Joe Valley 0:27
Hey, folks, Joe Valley here at Quiet Light Brokerage, and we’re not going to do the normal intro normalizing what we’ve been doing for the last three or four months. Because I have a guest, it’s not all that special. No, that’s not true at all. Sorry, Mark. My guest today is the co-host of the Quiet Light Podcast, Mr. Mark Daoust. How you doing today?
Mark Daoust 0:48
Mark? Can we put co-host in quotes because I think you’ve had what like the past three months solid of hosting the podcast.
Joe Valley 0:56
That’s why the ratings are going down.
Mark Daoust 0:58
That is why the ratings are going up. Because I haven’t been there. So sorry about that, folks. But I promise I promise upcoming episodes.
Joe Valley 1:07
One thing that I do like about the new podcast company we’re working with it’s Rise25, for those that don’t know, is that we know when this is airing. So this is airing we’re recording on December 9, but it’s going to air December 22, which is very cool. Because I would like to ask for a Christmas present. from everybody listening to the podcast today. No, I get I’m gonna get that from you anyway. You don’t know what it is yet. But I would like everyone listening to do what Mark?
Mark Daoust 1:39
Do leave a rating, leave a rating and a review on iTunes or whatever you use to listen to this podcast. How many rating ratings Do we have right now, Joe?
Joe Valley 1:49
I’m looking at at Apple. And there’s 40 of them, which is up six in the last 12 months. Because we never asked for them. never asked for them at all. Folks, help us out. Let’s jack up our egos and jump online and give us a rating and review after this. And then we’ll we’ll educate you on some things that we want to talk about today. And that is Mark and I want to abolish multiples, we want to rail on multiples, we want to gripe we want to vent we want to complain about multiples and why people are so obsessed with them and give you some information that we have in terms of an inside view and an inside look at multiples and why they shouldn’t matter as much as they do. So with that, Mr. Daoust, I’m gonna put you on the spot and say go let’s talk about multiples.
Mark Daoust 2:40
Well, let’s talk about multiples at all. We started talking about ratings, we want ratings, a lot of rain, we want ratings, we want reviews, and we do not want multiples, but multiples. Look, multiples are, I think a necessary evil in our business, we are going to have them because it’s one of the ways that we look at a valuation of a company. But boy, I could complain about a lot of elements of multiples. In fact, I have if you go search on the Quiet Light site and look back in our archives, you’ll find probably from 2010 or 2011, I wrote a blog post back then complaining about multiples because people get so obsessed with the multiples on the buy side and on the sell side that everything else the important data tends to fall away, which is a problem and something that that I think is problematic. But I want to start with my biggest complaint about the multiples right now, today. And one of the reasons that we decided to do this episode, and that is comparing multiples from one firm to the next, or from one marketplace to the next is a complete fool’s errand. We look at multiples, and we think this is a standard that we can look at Company A or broker j is offering you know, multiples in this range. And brokerage B is offering multiples in a different range. So no, broker a is better than broker B because they’re higher. The problem with this is that we assume that multiples are calculated the same from one firm to the next from one seller to the next if you’re just looking at a marketplace. And the fact is they are not they aren’t. And the problems get even more pronounced with the bigger size deals that you do. So why don’t we start with with that, Joe, let’s talk a little bit about how multiples are calculated just for an average deal. Let’s talk about just like a six figure transaction, maybe a low seven figure transaction fairly straightforward. We won’t get into the complexities of maybe a 10 to $20 million transaction where multiples become extremely difficult to calculate, but how they might be calculated different from one firm to the next.
Joe Valley 4:47
Mark Daoust 4:48
yeah, one area that you and I both know is a big difference between, say what we do and what other firms might do.
Joe Valley 4:54
Yeah, for sure. One of the things that we want to look closely at is those that include inventory or exclude inventory. Actually, before we jump into that, let’s talk about the purpose of a multiple from a buyers standpoint. You know, if you if you look at something and you’re a buyer and you say, okay, the multiple is three times, what you’re looking at is the amount of years, it’s going to take you to get a 100% return on your investment. So three times multiple, you get it back in three years. And from a sell point, buyers, sellers look at it, same thing, how many years worth of income Am I going to get when I sell the business? The challenge comes in, when you’re looking at listings from different brokerage firms. Almost every single one in the space that we’re in list businesses is a multiple of discretionary earnings, plus the landed Cost of Goods sellable inventory on hand, at the time of closing, if it’s a physical products business, there’s one firm that lumps the inventory into the purchase price. And I want to talk about the numbers and how big of a difference that makes. So let’s just go with your, you know, mid half million discretionary earnings figure and we’ll talk about discretionary earnings as well. And calculating that we did a whole podcast on that the three lifts different levels of add backs. If you if you don’t add back years, and you’re buying a business or selling a business, find the podcast on three different levels of add backs, and you’ll the light bulb will go off dramatically. I cannot control my dogs today. By the way, there’s one now in my office that is barking and jumping on the chair for those that doesn’t like
Mark Daoust 6:37
He doesn’t like multiples.
Joe Valley 6:38
Now here’s like multiples either or she. So a three time multiple on a business that is doing a half a million in discretionary earnings, you see a list price of 1.5 million. But let’s say for instance, that business of that size has a $400,000 in inventory that’s going to be purchased at closing, we’re really the end result is 1.9 million, but you’re going to see a multiple that looks like three times. And then there’s that separate inventory figure that’s going to be in there. On the other hand, if you want to flip to the type of listings that include the purchase purchase of inventory, in the list price, you’re actually going to see a list price instead of 1.5, you’re going to see 1.9 1.9 divided by the multi divided by the discretionary earnings of a half a million is a 3.8 multiple. So we’ve gone up point eight points in the multiple and what that does from a buyer’s perspective, you think, oh, my goodness, I’m gonna get a better deal from Quiet Light than I am from selling. So when the reality is the deals exactly the same. At the end of the day, the end result is 1.9 million 1.5. For the business 400 for inventory, it’s just that when it’s listed with another firm, it’s all lumped in to the purchase price. The challenge is, and from our perspective, let’s just rail on this from from from advisor standpoint, we don’t like it because it’s messy. And because during the time that we’re recording this podcast, that inventory value is going to change. So calling it 1.9 million and $400,000 worth of inventory. It’s not a reality. It’s not a firm number
Mark Daoust 8:27
one. And just to go on that point, too. I want to share when my opinion on this completely changed. Or maybe it was solidified, because I always did it this way. Right. I look at the multiple from a buyer’s perspective, particularly I look at the multiple as being obviously a measure of return on investment, but also discounted by risk and opportunity. Right? So somebody with a lot of opportunities is going to garner a higher multiple in principle, business with a lot of risk is going to lower that when you start wrapping inventory into that equation. It changes the perception of the risk and of the opportunity. And where I was really alerted to this was a business I represented 2010 I think maybe 2009. And it was a seasonal business. I won’t get into what it was it was around Halloween, and wasn’t particularly large, but they had a ton of inventory. And the reason they had a ton of inventory because I questioned them on this. Normally, if somebody has too much inventory I look at I said well, this is a bit of a problem. But this was somebody who had a specialized product. And it was very unique. But he wanted to have the largest selection in the world. And so he had a lot of products that weren’t moving that he carried one item of for the very purpose of being able to list them on his site at that point in time. That was a business decision that he made and he benefited from it because he was able to list that on a site. He got a lot of longtail traffic to those terms as well. And so the principle here and you can argue Whether or not, there were better ways for him to go about this than just carrying a bunch of inventory on hand. The argument is how much inventory you actually carry as a business varies from one business to the next, and also on the business decisions you make, without necessarily changing the calculus of the opportunity, or the risk of that business, which is, I think, one of the most important aspects of the multiple capture, what is your opportunity as a buyer, right? We want you to look at the payback, right? Three times multiple, right 33% return, assuming everything is good, but what is the opportunity? What is the risk of this business? And when you start to calculate the inventory, that brings another element, another variable into that calculus, which really doesn’t have a bearing on the risk or the opportunity out there? It’s just how that business is run. Yeah, it’s just it confuses it, right? It’s
Joe Valley 10:49
confusing enough to, to, you know, make a half million, a million, half a million and a half investment, without throwing that into it. So as an advisor, as somebody that’s been been doing this for nearly a decade, when we compete against the other firm, that will lump the inventory into the purchase price. And say, it’s a 3.8 multiple, it makes me want to compete on their level and simply say, yeah, we’ll do the same thing. But it’s not the right thing to do for the buyers. And it’s, you know, sellers can’t really count there, they can’t calculate what they’re getting, they’re just getting paid back for the inventory. They’re not getting a 3.8 multiple on their business, they’re getting three times plus, you know, they’re getting paid back on the inventory. The other thing that most that I want to focus on with multiples is you can’t make a decision based upon the multiple alone. Far too many buyers and sellers make a decision on who they’re going to go with, based upon what the multiples look like, on the listing page. We’ve got a teaser there, and there’s a multiple and you see that the what you don’t see is the logic behind that multiple, the Euro, will your growth, the upward trends, the downward trends, the defensibility of the business, the built in path to gross where there’s new skews that been launched in the last six months that already represent 20% of the business? Those things must be taken into account. And Matt, how it does it really well, he he’s always looking at the forward looking multiple, what is the multiple gonna be six and 12 months out, when I buy this business based upon current trends, I did some numbers a few years ago. And I really need to update this. And I think we should mark for maybe a blog post. So it’s up there for everybody to see the calculations. But if you’ve got a business that is growing 25%, year over year, and generally that’s kind of low, right for some of the businesses that we see, especially if it’s a young business that’s 24 or 36 months old, it’s probably growing at 100% year over year, but it’s growing at just 25% year over year. And it’s listed at a four time multiple the investor, the buyer, if all things remain equal, they’ll actually make their money back in 2.7 years. So because of that you cannot look at a multiple only and say, all right, well, it’s a three time multiple, therefore I’m going to make my money back in three years. Because you’ve got to take into account the growth rate, I’ve got one that’s launching in q1 of next year. And it’s got 300% year over year growth. I’m going to put it at a five time multiple. Actually, you know what I might not? I might not do that. Let’s jump to should we even put list prices on certain businesses? Oh, my goodness is a can of worms we can open right there.
Mark Daoust 13:50
Yeah, that that might be a discussion for another day, just because it is such a big discussion. I think the size, the size matters. But there’s another element that I want to touch on, I want to make sure that we get to it, rather than cramming it in on the end. And that is the structure of a deal. And what do we actually wrap in to a multiple you you shared a story with me a few months ago, of somebody that we know that sold their business through another firm. And you asked them what the multiple was that they got from the business or what they got. And the response was, it was telling because at the end of the day, they had no idea because with some businesses and I’ll give an example, but I want you to tell this story real quick to the extent that you can tell it. I’ll give an example of how complex this can be with large deals. What do you wrap in the multiple what do you what is an actual effective multiple is largely a PR spin on the brokerage firm to make themselves sound better, at least my opinion, but what why don’t you tell the story because it’s it illustrates the point beautifully.
Joe Valley 14:55
You’re saying you’re saying it in such a nice, not quite blunt way, but it’s kind of It is a PR stunt in many, many ways. Okay, so we it was actually a guest on our podcast, he reached out and said, Hey, man, I’ve started this firm, this is what I’m doing. This is how I’m helping people, and seemed like a great guy. And I thought it would be a good fit. And it was a good fit. I think some of the advice that he’s sharing in terms of Amazon, Amazon specific businesses, or you know, it’s really good and helpful. He did sell his business. So he had been there, done that. And then he became a consultant advisor to other folks. He didn’t sell it through us, though, he sold it through another firm, this one particular firm we’re talking about without doing their name. And he said to me, he said, they asked me for a testimonial. And I said, No, that the experience was was challenging. And he didn’t go into too many details. And I didn’t ask because I didn’t really want to talk about it too much. The podcast, I thought went well recorded. And then at the end, I talked to him a little bit about what he sold the business for, you know, and we tried to calculate the multiple. And he said, Yeah, I sold it for a 4.2 multiple.
Mark Daoust 16:10
I said, Oh, really?
Joe Valley 16:11
And does that include or exclude the inventory? He had trouble answering just that question. Is it alright, let’s, let’s pull out the inventory. How much inventory Did you have at closing? And what was your total purchase price that you’ve got total dollars deposited to your car? This is a multi million dollar deal. He couldn’t answer any of the questions he couldn’t, couldn’t come close to calculating it. And, as best as I could pull it apart, the multiple was below a three, yet he calls it a 4.2. A few months later,
Mark Daoust 16:50
I don’t know how to be clear, to feel that I sold that company is going to tell every other prospective seller, we got a 4.5 because they’re probably going to wrap something in there that he’s not even thinking about. Just because
Joe Valley 17:01
it sounds better. Not only are they going to tell everybody that but they produced a video on it. I somehow I got a link in my inbox, I started YouTube or something. And there’s that client, that’s that guy that wasn’t gonna do that testimonial. And the the the headline for the video is how to sell your business for a 4.2 multiple, or some something along those lines. Better than I thought, how deceptive is that? It’s so incredibly deceptive and unfair. It’s an over promise and under deliver something that we try really hard never ever to do, we want to under promise and over deliver. One of the things that we’ve learned, I’ve learned over the years, from Jason, who’s the longest tenured advisor here on the team, is that when you price the business, right, you get pretty darn close to asking price or above. When you jack the price up there, you include all sorts of things and others do it. Your offers come in way, way below where it should be priced right, and never come up high enough buyers look at it going, Okay, I get it, I see what they’re doing. I’ve got to come in really low in my offer. And then we’re going to play this game going back and forth, and never quite get up gets up high enough. Jason’s had that happen said yet, what you want for the business too much, I’m not going to go ahead and list it. It’s not going to work, it’s not going to sell. Go ahead and work with the other firms. If you want to win, if anything changes come back to us. They come back. And he says, All right, well, we’re gonna price it here. And when he prices, it right, gets sold very quickly, at a higher price than you know, the fully negotiated back and forth when it’s overpriced. It’s a fascinating, fascinating process. doing it right. Under promising and over delivering.
Mark Daoust 18:50
Yeah, so let’s revisit the construction of the deal. I want to actually sketch this out for somebody. And I’ll use a completely made up example, based in reality, right, so if this was a movie, it would be based on a true story. So what you would see at the beginning of this of this example, imagine that you saw a company that is doing $3 million in earnings, right? And the structure the deal is that the client gets $8 million in cash at close an additional $3 million, pay it out over two years, guaranteed. So now we’re up to $11 million dollars. And then there’s some escalators or stability payments, that stability lovers and their which make that $3 million, potentially four and a half million have certain targets are reached. Right. So now, you know, we’re potentially upwards of $12.5 million for the business. And then let’s throw on a consulting fee of of a million dollars over the course of the two years. So a salary for certain expectations. And then on top of that there’s another performance bonus which is binary it’s not tied to this regular financing of another million dollars that could be paid out. Right? When you start to do the math on this, oh, plus, I didn’t even bother to consider the inventory, which will be purchased separately, which is another $700,000. To the business. We didn’t even bring up working capital, at what point
Joe Valley 20:20
what 15 point 2 million with that inventory right now.
Mark Daoust 20:23
Right? So if I’m a business owner, what do I care about, I’m probably going more off the $11 million number, right cash or close and guaranteed amount of money paid and financing. That’s what I’m going to go off of as far as my multiple, if I’m the brokerage firm trying to attract new clients, I’m going to go off have big number 15, you know, 15 plus million dollars and say, we got nearly a five time multiple for this business, right. And then if we even consider something such as working capital, the discussion gets even more complex. And the fact is, these are considerations, especially on larger transactions, larger transactions are rarely pure cash, get out, you’re done. They typically are made up of cash at close financing, maybe some level of performance leavers in there. Plus working capital considerations for money at close and inventory adjustments as well. So what I’m concerned about when I’m dealing with multiples, and one reason that that I like the approach that we take, and obviously I like the approach we take, but I like the approach we take because it speaks directly to the amount of money that goes into our clients pockets. The problem and one of the reasons that we’re doing this episode is that potential sellers that come to us will hear the multiples and they lock into the multiple as opposed to the number. And then they go to another firm. And that other firm quotes a higher multiple, and they assume the assumption is this is what I’m going to get in my pocket. At the end of the day. We don’t sell $15 million businesses, usually with a very simple structure, there’s typically a few more wrinkles to it. And so those questions of how much money am I going to have at the end of the day? Is that really what matters? Should that really be the calculus that we use. But again, the problem is when buyers are looking at businesses across brokerages, when sellers are looking at who they’re going to hire, they take a look at the multiple and assume that it’s calculated the same from one place to the next one. The reality is it can be diced up in a lot of different ways. Depending on how you want to do it, I would be tempted to quote a seller a five times multiple but listed on our site as a three time multiple, depending on how you do the math
Joe Valley 22:27
right. Now we’re just completely making up numbers to fit our narrative. And is that really the right thing to do? Probably not probably now we can we can rail against the machine all we want. But you know, we’ve been doing this for 14 years, I’ve got a certain brand and reputation and we’re gonna do it right, regardless of what anybody else does. And and, you know, you brought up that it’s not the multiple doesn’t get deposited to your bank account. It’s it’s dollars actual dollars. Pat, and I want a valuation call yesterday. And you know, he asked the question, What are you hoping to exit the business for? When she said 2.8 2.8 2.8? of what I you know, and then what is the what? How do you calculate the what really What do you want, you know, to hit your bank account dollar wise, and let’s reverse engineer a path to, you know, to getting there where yet today? Where do you want to be the multiple, you know, what it’s, you want to make sure, obviously, that you’re getting paid a fair value for the business and the buyer wants to make sure they’re buying it at a fair value. But the multiple should be secondary, in some ways. Maybe Mark what why don’t we just take the multiple off of our off of our listings, just put the list price up there, but don’t put the multiple,
Mark Daoust 23:44
I am very tempted to do that. And it might be a change that we see soon. Because we want to get rid I want to relay to other issues. I’m going to just say one of the problems that I’ve had with multiples and if you go back in our archives, you’ll see that I wrote on this particular topic is the impact on buyers, and a buyers tendency to discount a business right out the gate without knowing anything about it because the multiple listed is quote unquote, unrealistic, right, which is a complete just fallacy to go into a business or into an acquisition thinking it’s unrealistic based off some measure of a multiple depending on what that is. But we ran into this coming out of the Great Recession, right, the Great Recession, businesses were discounted across the board, businesses were discounted, and for good reason. Most of them had declining revenues, they had declining earnings. It was a challenging environment. The businesses that were coming up for sale were inherently sick, they weren’t they needed some work that needed some, some effort to be able to turn around. And it was a much more speculative investment. It was also a time of a lot of upheaval with search engine algorithms and how these businesses were built. So they garnered lower multiples, but I remember clear as day having good businesses start to trickle into our pipeline, as we’re coming Out of the Great Recession. And these businesses, they were solid, they had growing revenues through the recession. They had good foundations and good futures. And if we put them up for sale for a reasonable multiple at the time of maybe three, on just the earnings, so $100,000 business for $300,000 $500,000 business for $1.5 million business, the pushback we got from the marketplace was substantial, saying, what are you doing listing something at a three time multiple, Nobody sells your business for three. So who would buy something for three time multiple? And what was happening was there is this tendency from the buyers from the buyer marketplace to actually filter out really good quality businesses, because when I would talk to sellers, the people that had these growing businesses, and I would tell them, hey, look, people just aren’t looking at something over three times multiple, they would say, Well, why would I ever sell for that? And I my natural agreement was I wouldn’t, I would wait. Obviously, that broke through eventually, we got people to look at these better businesses. But it’s a danger when we discount something just based on the multiple itself or go in prejudice to say, this client is unreasonable. The seller is unreasonable. Because no one pays x times for this business. The fact is, if there’s a multiple out there, that’s outlandish, and I know Brad, Brad represented something I was over a 10. Time multiple recently. Yeah, there was good reason for that. And we actually had some really, really strong interest on that, that that could have worked out, there was solid reasons for that, that were justified. In Joe, as you like to say, math and logic. It wasn’t we’re still looking for the same old the same old proposition of a good return on investment for our buyers, that multiple might be a 10 time, we’re still looking for a good competitive return on investment, even in that 10 time multiple on the business. The second thing I want to talk about Joe would be projections, or what are we actually multiplying? Right? So there’s another firm in our space, I have a lot of respect for them, but they use a monthly multiple. And boy, did that look great in their early advertising, sell your business for 36? x? Yeah, well, that’s the same thing as three x depending on what you’re using as the 36. Right, or other firms that I know of that I’ve taken a look at the last three months, projected that out and multiply that what’s wrong. Nothing at its core, if it’s fully disclosed, right. But I think it’s important for buyers, again, when you’re looking at a business, if you’re going to use multiples as a measure, if to have a consistency of what that measurement is. This is like taking a ruler with all sorts of different measurements on it and saying it’s six, six, what? Yeah, it just the ruler says six?
Joe Valley 27:51
Yeah, the problem with a annualizing, the last three months is seasonality. It’s just, you know, unrealistic. And too many people take that simple approach. You know, none of what we do is rocket science. It’s just hard work using math and logic and protecting both buyers and sellers to make it fair all around. It’s a it’s a funny thing. And I think that the point of this podcast is to educate both buyers and sellers on the math behind multiples and doing it properly. inventory is a constantly moving number and should be excluded. It’s a multiple of discretionary earnings. And don’t just look at the multiple, like we said, you know, if it’s got 5075 100 300% year over year growth, and it’s not if it’s if it’s a seven time multiple, it’s there for a reason. You don’t see that very often, right, ultimately, who decides if a multiple is acceptable or not Mark? Me, you, the seller, the buyer and the seller,
Mark Daoust 28:52
to the buyer and the seller? Yeah, the buyer has to be willing to pay and that’s all it has to be Yeah,
Joe Valley 28:57
yeah. Now some of these new, you know, investors where they’ve raised capital, they get specific guidelines from their investors in terms of what they can pay. And maybe they’re just playing us but they say they can only pay up to a certain multiple in cash, and then they got to pay the rest through an earnout, stability, payment, whatever it might be. It’d be nice to get a hold of some of those documents. So if anybody has any, on these big investment firms that are holding companies that have raised 200 million, yes and Mr. Why?
Mark Daoust 29:26
Why again, I think the math can be can be figured out depending on what narrative you want to fit I do know that some of these companies have what they put out there as what they’re paying in multiples. And it doesn’t always match up with a deal logic out there. That’s it I one other point to look at. What are the big guys do private equity, right? This is this is their game. Their game is acquisitions. That is what they do they acquire companies. Are they concerned about multiples? No. They laugh at what we do is like Oh, okay. We’re going to offer what makes sense, in fact, in the world of private equity at putting a listing price, which you already alluded to, is not really the common practice, it typically isn’t done by private equity is going to pay what makes sense. For them, they’re going to try and get the best deal possible in that transaction, but they don’t look at the multiple. That would be.
Joe Valley 30:20
Yeah. So just to look forward, folks, I mean, I tell you right now, I sold the business in 2018. It was a beautiful business, defensible, good eurovia growth, utility patent on one of the primary skews. And person that runs that business runs at part time, and they’re back, he’s ready to move on, to just focus on his day job and not be so distracted. We’ve got 300% year over year growth, it’s fully defensible discretionary earnings are going to be you know, in the 1.11 point 2 million range for 2020. I may put that out there without a list price on it. So you may see one of those in q1 2021, just to see what happens. Because ultimately, you know, those private investors are going to pay what the business is worth. We don’t have to dictate what you know, it’s worth if they make an offer that’s not up to snuff, you know, for the seller, of course, we’re just going to decline it. But it’s, it’s what most of the investment banking firms do. They don’t put a price on a business, they put the package together, and send it out to a select list of buyers and let those buyers make offers.
Mark Daoust 31:30
Right, I know the objection to that I’ve played around with this in the past, I’ve offered an occasional business without an asking price and the immediate pushback I got from buyers as well, what are the sellers expectations? You know, I think for most of our buyers who have been around for a while and have looked at a lot of deals, you should understand what the expectations generally are. Right. And if we think that the expectations are outlandish, we’re gonna let you know that. But the fact is, we all know that a business that is growing rapidly deserves a higher price point. And you should still be looking at this from the same perspective, what is a reasonable return on investment, and what is my target for this and that that seller is they have the exact same calculus on their side, which is I want a reasonable return from the sale. I don’t think it’s rocket science for us to figure out where these numbers actually fall. And what would make a what make a reasonable offer for for pretty much any business out there. Interestingly enough, you mentioned pricing the business right, and getting the you know, price in the right way. Jason’s experiment on this, there was a specific client that he worked with where he, you know, we often consult with our clients about the price that they want, Jason came in with his opinion, as far as the valuation of the company, which was fairly aggressive, the client wanted substantially more, so Jason agreed to put that business up for sale at that price point. And he received offers, but those offers were nowhere near the asking price. Later on, when that first round of interest wane, we lowered the, the asking price lightly. And the subsequent offers that came in were actually higher than that. So it’s an interesting dynamic that you alluded to. And I just want to say when we look at our own internal metrics, we get our asking price or above asking price, close to 50% of the time, right? It’s, it’s a testament to the idea that a there’s a lot of buyers out there, we’re getting more than one offer, we’re able to maximize that marketplace, on behalf of our clients, but it’s also proper pricing, right the marketplace does work, it does help surface the actual value of that business or where that that that intersection of what a buyer is willing to pay and what that seller is willing to accept lies. So it’s an efficient process.
Joe Valley 33:43
Great. And it’s, you know, it’s taken you and I years and years and years to figure all of this out and the little nuances between multiples and how businesses should be valued. For those that are in the audience that are eventually going to sell their business, the best thing that you can do is figure out what it’s worth today so that you can you know, set your ethical and exit goal and reverse engineer path to it. For those that are buying pay attention to the multiples in terms of what’s included in the multiple Is there a you know, pro forma p&l that the multiple was based off of, we’ve seen competitors do a 12 month pro forma p&l and based on multiple off of that, which is just crazy. We’ve done them up to three months because it takes you know about three months from listing to close, which is you know, math and logic, everything should be based on math and logic. And look at it for looking multiple as buyers when you’re looking at things. It can set you apart from other buyers that are not doing that and have to for a logical reasons stick to a certain multiple, but it’s all there. It’s all math and logic. And ultimately, if you pay attention to these things and study them and become an expert at that You’re going to make better investments and and get much, much better return on your investments as well.
Mark Daoust 35:05
Well, I’m glad that we finally got this episode recorded. Joe, I don’t know if you have anything else to cover in this. But I feel like overall, you know, this is pretty comprehensive. I think the big lessons from this are, understand that multiples is a calculation. And depending on how you’re running that calculation, you’re going to get a different number. What actually matters on the sell side is how much money comes into your pocket. What matters on the buy side is what is your return on investment, discounted by the risk and growth opportunities of that business. It really is as simple as that. And depending on how you run the calculation, you can come up with all sorts of different numbers. But don’t assume that it’s the same necessarily even from one business to the next. And definitely from one brokerage to the next. It’s one little piece of data and an entire picture, an entire ecosystem of data, and probably one of the more less important bits of data that’s out there. So I would say those are my big takeaways from this. But be careful about relying too much on multiples as a universal metric.
Joe Valley 36:00
And back to things that are not important. Our reviews and ratings on the podcast
Mark Daoust 36:06
that’s important for our egos.
Joe Valley 36:10
I don’t know, you know, we’ve got a colleague friend that has a very, very good podcast. And about a year ago, I was at Blue Ribbon mastermind and was up on stage and jokingly saying, Hey, everybody in the room get let’s get some reviews and ratings. This guy’s only got 54. And he’s been doing it for four years. I would like to just, you know, swamp him. And I was only kidding. And of course, you know, I didn’t follow up on it. He’s got about 254 reviews now just because he asks for them. So please, folks, we appreciate the emails. We appreciate the feedback we appreciate the comments and the fact that you’re listening and doing everything you can to to make good investments and grow a business it’s going to be a great for a buyer to take over. You know, give us a look. Give us a review. We appreciate it.
Today’s podcast was produced by Rise25 and the Quiet Light content team. If you have a suggestion for a future podcast subject or guest, email us at [email protected] Be sure to follow us on YouTube, Facebook, LinkedIn, Twitter and Instagram and subscribe to the show wherever you get your podcasts. Thanks for listening. We’ll see you next week.