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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