What’s the Multiple All About

FIRST SEEN IN LP GAS MAGAZINE | If you look into how businesses are valued you will likely hear that the most common method is a multiple of EBITDA (Earnings Before Interest Taxes Depreciation Amortization) sometimes referred to as cash flow or operating income.  Actually, when a valuation is performed it is typically done on a multiple of “Adjusted EBITDA”.  Financial information is adjusted to normalize the earnings.  There could be weather adjustments, hedging adjustments, expenses that could have been capitalized and there are almost always adjustments to remove owner compensation and expenses that would not occur under new ownership.  These are sometimes referred to as owner add backs.

Every purchaser will also do their own financial model to come up with a “Purchaser EBITDA” based on operating synergies and projected gross profit and operating expenses.  So, everyone looking to purchase a company will have a slightly different EBITDA calculation.

No matter what EBITDA you come up with you have to pick a multiple to use to calculate a value.  You also must determine what assets are included in the value.  Does it include real estate or propane tanks or vehicles or working capital?  Once again, every purchaser will include different assets, however comparing apples to apples on an offer becomes easier as you can quantify the value of most of those physical (hard) assets.  It’s getting to the intangible asset value of customer list and goodwill that has you make the jump from math to art.

Determining the multiple of EBITDA to use is based on value drivers.  What makes one business more valuable than another?  Let me give you an example.  Take two propane companies.  Both have $2 Million in company owned propane tanks at customer locations, however for one, that represents 90% tank control of total customers and for the other 20%.  The company with 20% would be a larger company in volume and probably EBITDA, however they would have less of a value multiplier, as the lower tank control would be perceived negatively by a purchaser.

Here is a list of several micro-economic value drivers:

  1. Size of Business
  2. Percentage of company owned propane tanks
  3. Customer makeup- residential/commercial/agricultural
  4. Customer demographics – median household income
  5. Vehicle and equipment age and condition
  6. Bulk tank storage/real estate
  7. Concentration risk analysis (Bids/Co-ops)
  8. Safety & Compliance (propane gas checks)
  9. Automatic delivery
  10. Tank monitors
  11. Service contract percentage
  12. Customers on a budget
  13. Customers using automatic credit card payment
  14. Exposure to natural gas/electric conversions
  15. Competition for assets
  16. Employee non-competition concerns
  17. Product mix
  18. Union vs. non-union employees

There are some other macro-economic factors that will affect the multiplier.  The big one is the cost of capital.  Buyers are looking for their best return on investment and most buyers are not using 100% of their cash.  Easy access to capital and low interest rates can drive up multiples.  Low product cost means less working capital needed for revolving lines of credit.  This also drives up overall return on investment and as a result it drives up the multiple.

Tax incentives are another macro-economic value driver.  Accelerated depreciation as an example gives purchasers an incentive to get above market after tax returns.  That is an environment that incentivizes investment in business and also drives up value.

If you are a purchaser looking to acquire a business, do your adjusted EBITDA financial projections and take a hard look at the value drivers to make the best investment you can.  If you are ultimately a seller, you should also look at ways to maximize your EBITDA and be able to identify and quantify your adjustments.  Sellers should also take a hard look at value drivers to plan on a maximum return on your business asset.

Steven Abbate

November 2020

First published in LP Gas Magazine, November 2020 edition

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We were very pleased to have such a knowledgeable and experienced company in our corner with the team at Cetane. It was obvious that they knew the best process and how to get the ball over the goal line. Their advice throughout the process was greatly appreciated and we thoroughly enjoyed working with them.

— Steve Lombardi, Brodeur’s Oil, Moosup, CT