As you may or may not know, we are incubating a rapidly growing company in our office. Fun stuff. And while this may be a bit of an exaggeration, they seem to have a new hire every week. If you want to know how we put that company together, and it is a cool story, shoot me an email.
The latest new hire is my favorite. He was reading my book, Mergers & Acquisitions For Dummies, even before accepting the job. When he figured out the author of his new favorite book works in the same office – I think the oversized cover I have on my office wall was the clue, see the attached pic – he was bowled over and extremely impressed with me. Obviously, he’s not seen me slice one off the tee. So please don’t tell him; I’m desperately trying to cling to his initial impression of me.
Anyway, he recently stopped by my office and asked me a question about valuations. He said my book states 4X to 6X is the typical range, with 5X being the industry standard. For you little leaguers scoring at home, here’s the actual passage, from pages 188-9…
“Five times EBITDA is an industry standard, a convention of deal-making. Nobody knows where it came from, but all you need to know is that it’s a de facto standard. In good or bad times, that multiple may be a bit higher or lower, which is why I give you the 4X to 6X range.”
My young acolyte and book club fan asked me how I, the wizened, grizzly, M&A bon vivant and man around town, could be so off with that valuation range. “Five times seems awfully low,“ he said. “In my long work history of being a support person in a high stakes deal making enterprise…three weeks and counting…I haven’t seen anything even remotely approaching such base, low, and prosaic valuations. What sort of hoi polloi reads your book?!”
I quickly quashed the rejoinder that apparently he was the prosaic hoi polloi audience who reads my book. That would be brusque, churlish, insolent, and scurrilous. But I also had to quickly scramble to come up with a good answer to his question, so I did what we all do when we’re caught flatfooted by a younger, hungrier, know-it-all…I changed the subject.
“Hey, young Einstein, take a sojourn from using voluminous confabulations as you endeavor to impress others whilst engaging in a verbal tête-à-tête, nobody likes a braggadocio who fancies himself a rhetorician à la the second coming of Cicero or even the Stone Roses,” I politely and succinctly opined. “Who do you think you are…Picasso at the Lapin Agile or worse, an investment banker who sends out verbose emails to a cadre of steadfast readers?
After throttling back my young charge’s semi-wiseacre comment, I regained my cerebral footing and told him, yes, the industry standard of 5X seems as outdated as the Model T, pet rocks, smoking in bars, Mr. Mister albums, and people who walk without texting. I told him when I wrote the book, way back in 2010 when he was still in high school, I figured it would have a long shelf life. The process of buying or selling a company doesn’t change much over time. I wasn’t writing a book about a software program or a computer operating system, after all. I had no idea that within just a few short years M&A valuations would reach tulip mania levels, thus rendering moot my seemingly timeless valuation guidance.
And when I said that, immediately I thought to myself, this isn’t going to last forever. We will return to “normal.” M&A valuations will eventually return to their long term historical averages. And for anyone on the fence about pursing a sale transaction, now is the time. I’m not going to tell you when this will end, I don’t have that skill, heck, I can barely keep a golf ball in play these days, but it will end. Now is the time.