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Thinking about selling your business, but have some questions first? Want to know more about business buying opportunities? Ask the experts at Strategic Endeavors, where you'll get the advice you need to move forward with your business goals.
Q:
How can a company use size in an acquisition to create value?
A:

Generally, larger companies sell for higher multiples of EBITDA (cash flow) than smaller companies. Suppose Co. A has sales of $10 mil, EBITDA at 9% of sales ($900K), and would sell for 5 X EBITDA ($4.5 mil). Suppose Co. B has sales of $40 mil, EBITDA at 10% of sales ($4 mil), and would sell for 6 X EBITDA ($24 mil). Co. B acquires Co. A. The combined company has sales of $50 mil, EBITDA at 10% ($5 mil), and suppose it would sell for 6.25 X EBITDA ($31.25 mil). By acquiring Co. A for $4.5 mil, Co. B has now transformed itself into a company worth $31.25 mil. That is an increase of $7.25 mil on an investment of $4.5 mil or a 61% return on investment.

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