Today, a friend told me about an incident when he was advising on a company acquisition. His employer, the prospective buyer, wanted to buy a billboard company.
The billboard company only rented space. They made $750,000 pee year. Of that, $225,000 was profit. The owner did not make anything else from the company.
The sale price was $5.6 million. My friend said it was a multiple of 8 times revenue.
The reality is that most comapnies $2 million in sales sell for a multiple of three to five times the income of the owner. In this case five times $225,000 or $1,125,000.
Extenuating circumstances that would raise the price would be protected ip or land on which the billboards sat. There was neither.
The owner claimed that it was definitely worth more because he could easily go out and double the income. That is a load of garbage! If it is worth that much then the owner needed to go out and make it worth that much. My thought was that he should not get paid for laisiness.
My friend recommended his client (the buyer) should walk. I agree.
Lessons learned:
Multiplier on owner’s portion is three to five.
You don not add in potential unless it is protected ip and then it depends on a lot of other factors.
If it smells bad then walk. This deal stunk.
