Business Appraisal or Investment Bank?

Small Business Appraisals: Should You Just Hire an Investment Bank Instead?

How much is my company worth? Every business owner should be asking this question! Business owners usually plan to sell their company eventually, and understanding the business’ actual value is absolutely critical to planning a retirement strategy.

There are many valuation services that cater to small, privately-owned companies. These services can cost up to US$50,000 and will use a multitude of valuation techniques. The end product is an intricately detailed report that attempts to determine the intrinsic value of the company. Yet when it comes to selling a company, such services always overlook one important fact. At the end of the day, the most important determinant in a seller’s price is how much the buyer is actually willing to pay. Appraisals can be useful for getting a ballpark estimate of your company’s worth, but complex valuation models won’t change the fact that pricing mainly depends on the buyers, especially when the company isn’t publicly traded. This is why it is so important to have the right buyer.

The only time a business owner will ever get a completely accurate valuation of his or her company is when it is finally brought to market. Even if one chooses to get the business appraised beforehand, one would still need to find real buyers afterwards. Just because a valuation report claims that your company is worth US$20 million doesn’t mean that buyers will be willing to instantly hand you US$20 million in cash. The M&A process including painstaking negotiations are still necessary to secure a strong offer, especially if you have any specific preferences on deal structure (e.g., if you want to stay with your company after the sale). Most of the time, an auction process involving multiple bidders, will maximize the value of the business, and with the right buyer, you will receive an offer higher than the initial valuation.

That’s where a boutique investment bank like Versailles Group comes in. Versailles Group has nearly three decades of experience in searching for and negotiating with buyers from around the world. By applying its expertise and experience, Versailles Group will enable you to obtain the maximum value for your business. Hopefully, this will give the business owner some insight into the question: small business appraisal or investment bank?

Since 1987, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world, which is why it has won several M&A awards. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

(Photo by Don Grava)

Technology Sector M&A Activity

(Please click the chart for easier reading.)

Technology Sector M&A Activity

Across all sectors, M&A activity, for the twelve months ending May 31, 2015, has increased relative to the same time period last year. Both strategic and financial buyers are completing more acquisitions because of the recovering US economy, the impending interest rate hike, and other factors. The data above illustrates the increase in M&A deal volume in the middle market.

The technology sector has accounted for most of the increase in deal volume. In the last three months (March-May 2015), there were 526 deals completed in technology services-- more than any other sector. That number is up from 477 technology services deals completed from March-May of 2014.

The need to innovate, grow, and keep pace with the changing technological landscape is fueling M&A volume in the technology sector. Technology companies are increasing their IT capabilities via M&A strategies to scale their operations, develop domain expertise, or for growth prospects.

The rationale for acquisitions in the technology sector is strong: internet data traffic is expected to triple from 2014-2019. In addition, 50% of this internet traffic is expected to come from devices other than traditional desktops. Technology companies are acquiring businesses that enable them to ensure growth through the development of new technologies or to penetrate new markets.

Whether it's a tech company or not, if you are interested in completing an M&A transaction there is no better time than now. The looming interest rate increases, possible change of political party, world events, etc. are driving people to complete deals before it's too late.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. As one of the leading middle market investment banking firms in Boston, the firm’s focus is obtaining superior results for its clients. That’s the primary reason why Versailles Group has done more repeat business than any other middle market firm. The net result for our clients is a superior transaction, whether it is on the buy or sell-side.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

Valuation Multiples and Selling your Business

Valuation Multiples and Selling your Business

Valuation multiples can serve as a starting point for estimating the value of your company. The valuation process, when utilizing multiples, is simple: by multiplying a financial metric such as EBITDA by an appropriate multiple, you arrive at a rough estimate for the enterprise value of your company.

So, you ask yourself, I know my company’s EBITDA, but how do I assign the correct multiple so that I calculate a fair enterprise value? The rote calculation of EBITDA*multiple is simple; however, assigning the “right” multiple is an art.

Generally, certain industries have a typical range of multiples for companies that exist in that space. A simple Google search will present websites that claim to provide “valuation multiples by industry.” But if you want to hone in on a more accurate multiple, you are encouraged to do more in-depth research. Organize a list of publicly traded companies that have a similar financial and business make-up to the company you wish to value (i.e., they operate in the same industry and have other similarities). Next, compile a range of trading multiples for these companies by dividing their enterprise value (“EV”) by a financial metric like EBITDA (EV/EBITDA, EV/REV, etc.). With certain adjustments, e.g., including the smaller size of your company versus the public company, which decreases the multiple, this range of multiples should provide you reasonable guidance. Next, multiply the EBITDA of your company by this range and you will have calculated a valuation range for your business. However, this process (called “comparable companies analysis) may be unreliable because it is based upon today’s market prices, which may be volatile. It may also be inaccurate as many adjustments need to be made to the multiple. For example, if your company has high customer concentration or a union, it's likely that your multiple will be penalized versus other companies in your industry.

Another way to calculate a multiple range is to look for comparable companies that have recently been purchased via M&A transactions . If you can attain the purchase price for a similar company, as well as its relevant financial metric (revenue, EBITDA, etc.), you can calculate its multiple. This is actually a more valid multiple range, provided the data is current. However, this process of “precedent transactions analysis” can be inaccurate because some strategic buyers place a high “purchase premium” when acquiring certain companies, which results in a valuation far above fair market price. In addition, economic conditions may have changed since the time of the previous purchases, so that the multiple range might reflect different market conditions.

The valuation derived from these methods serves as a starting point when discussing company value with your M&A advisor. However, it is just that-- a starting point. It is important to remember that valuation multiples are based on comparisons to similar businesses, yet no two companies are the same. Your company may operate in the same industry and provide a similar service/product as another company, but there are certain unique characteristics of your business that may result in a higher or lower multiple than expected. For example, Company A has similar EBITDA to Company B in the same industry. However, Company A commands a higher valuation because it is deemed a higher quality business due to superior management, branding or other reasons.

There is a fundamental flaw in the structure of the multiple. The denominator represents a financial metric-- such as EBITDA. However, EBITDA is an imperfect proxy for free cash flow because true free cash flow includes taxes, working capital, and capital expenditures while EBITDA does not. And free cash flow truly drives the value of a business. Thus, buyers will often stray from the simplistic EBITDA*multiple valuation that the business owner expects to receive because buyers base their bid on true free cash flow generation and other important factors. Therefore, a business owner should not be surprised if the initial valuation projection via a multiple is too high (or too low). Valuation is truly an art, and an M&A advisor like the Versailles Group can perform an in-depth financial analysis to help a seller target a fair, but full valuation for his or her business. Furthermore, marketing the company properly will find the best possible buyers, which will always result in the best possible valuation.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. As one of the leading middle market investment banking firms in Boston, the firm’s focus is obtaining superior results for its clients. That’s the primary reason why Versailles Group has done more repeat business than any other middle market firm. The net result for our clients is a superior transaction, whether it is on the buy or sell-side.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

When To Sell Your Business

When To Sell Your Business

One of the most important questions in M&A is: When To Sell Your Business?

M&A in the middle market is stronger than it has been in years. Now that the domestic economy is gaining traction, an increasing number of companies are becoming interested in making acquisitions. As a result of this robust demand, valuations have been driven higher in nearly every sector.

Despite these higher valuations, sellers continue to show hesitation when it comes to the sale of their companies. As shown in the chart below, only 9% of mid-sized companies in 2015 are currently involved in a sales transaction, while another 6% are also actively seeking to be sold. These figures have shown little change from 2014, when 6% of companies were being acquired and another 6% were seeking opportunities. In summary, companies are still hesitant to put themselves up for sale, despite strong demand for acquisitions and attractive valuations.

Right now, some of these companies may be unwilling to sell because they suspect that demand and valuations will reach even greater heights in the future. Yet timing the market is always difficult. M&A conditions in the middle market are currently very favorable for sellers and it is difficult to speculate how long these conditions will last. A decrease in demand from buyers or an increase in the number of sellers could reduce valuations as demand falls and supply increases. For sellers trying to receive the most consideration for their companies, the key is to be ahead of this shift.

To answer the question when to sell your business, the time is now. The market is strong, the multiples are high, and buyers are plentiful.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. As one of the leading middle market investment banking firms in Boston, the firm’s focus is obtaining superior results for its clients. That’s the primary reason why Versailles Group has done more repeat business than any other middle market firm. The net result for our clients is a superior transaction, whether it is on the buy or sell-side.

If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

The Benefits of M&A From a Buyer’s Perspective

The Benefits of M&A From a Buyer’s Perspective

For those of you looking to sell your company, the benefits of mergers and acquisitions are probably already obvious: you want to retire or do something new, and now you’re looking for a big cash payout. If you’re a prospective buyer, however, the advantages of M&A may be less than immediately apparent. Why should you ever buy another company? What good can that really do you? These are the types of questions we intend to answer in this blog.

Buying For Growth

Buying another company is most beneficial when the acquisition is part of a larger “growth strategy.” While it is always possible to spur growth organically by building and developing new operational capabilities, this path will requires millions of dollars spent on new product development, countless rounds of hiring the appropriate staff, and many years of hard work. In the meantime, your company may already have been leapfrogged by its competitors.
In summary, M&A can spur growth for buyers in the following ways:

Expanding your product line and markets

While developing new products and entering new markets on your own is feasible, inevitably, it will be an expensive and time-consuming process. Additional people need to be hired, new research and development will needs to be done, and fixed assets may need to be purchased. In the meantime, you may lose your footing to a faster-moving competitor. In contrast, acquiring another company’s existing product line in bulk can be a surefire way to stay ahead of the competition.

Achieving synergy

In the context of M&A, “synergy” describes how a successful acquisition can create a new company that’s more valuable than the original buyer and seller combined, e.g., 2+2=5. In other words, becoming bigger makes your company more efficient. If your company purchases another company, the new combined entity will have greater purchasing power, better access to technology, lower borrowing costs, etc. The combined firm, if done properly should have less corporate overhead as the new entity only needs one accounting department, one HR group, etc. to run both firms.

Gaining market share

You can also use M&A to outgrow or eliminate competitors in your industry, both directly and indirectly. Organically developing your own business to keep up with competitors is a messy and difficult process, but a strategic acquisition will immediately remove at least one competitor from the field. In addition, making a synergistic acquisition will make your company larger and more efficient than your remaining competitors.

Conclusion

The benefits of M&A from a buyer’s perspective are achievable; however, if one is serious about pursuing this avenue, it is highly advisable to retain the services of a responsible M&A advisor who can guide you through the process to a successful conclusion.

Founded in 1987, Versailles Group is an independent, middle market boutique M&A firm and offers its clients access to buyers and sellers worldwide. The firm provides its clients with a high level of personal attention coupled with over 28 years of cross-border transaction experience. Clients benefit from world-class advice, broad expertise, and flawless execution. The net result is a superior transaction, whether it is on the buy or sell-side.
If you are interested in buying or selling a business, please contact us for a free consultation.

Donald Grava
Founder and President
Versailles Group, Ltd.
617-449-3325

(Photo by Don Grava)

There are many reasons why owners may want to sell a business quickly. Health issues, looming tax changes, shifting market dynamics, or operational fatigue can all create urgency. Although the desire to quickly sell a business is understandable, haste in the M&A process carries its fair share of risks.

Versailles Group, with almost four decades of experience advising business owners on complex transactions, has seen this dynamic play out many times. Experience shows urgency should never come at the expense of maximizing outcomes.

What Owners Risk by Rushing a Sale

The most obvious risk of an accelerated process is a potentially lower purchase price. Finding and approaching interested parties is a delicate and time-consuming procedure; by rushing through a transaction, you risk passing over the “right buyer.” In several transactions, we have seen strategic acquirers ultimately pay significantly more once given time to evaluate synergies.

Strategic acquirers, who often pay the highest premiums, usually require more time. A capabilities-driven M&A approach is proven to deliver stronger shareholder outcomes: a PwC study of 800 acquisitions found that deals with high strategic fit generated a 14.2 percentage point higher annual total shareholder return (“TSR”) compared to deals lacking such alignment (PwC Report).

We’ve seen the same dynamic firsthand. In one particular transaction, a buyer from South Africa ultimately outbid domestic buyers by 2.5x. That premium was only possible because the process allowed for proper positioning and global outreach. Compressing the timetable would have eliminated the opportunity altogether.

Speed can also create the wrong perception. Buyers may assume urgency signals hidden problems in the business, which can reduce trust, depress valuations, or even scare off potential bidders. Managing the narrative is critical. Versailles Group has repeatedly mitigated this risk by preparing documentation in advance, ensuring transparency, and running a structured process that preserves competitive tension even under tight deadlines.

Finally, a rushed process undermines due diligence. Serious buyers, especially those willing to pay a premium, expect well-organized financials, operational data, and legal documentation. If sellers rush, errors or inconsistencies are more likely to surface, which can reduce buyer confidence, lower valuations, or even derail a deal entirely. A compressed timeline often leaves sellers reacting to buyer requests instead of proactively managing the process, which shifts negotiating leverage away from the seller.

Early Exit Planning: The Solution

Urgency often stems from delayed exit planning. This is a situation that can be avoided entirely. In another Versailles Group blog, “Planning to Exit Your Business?,” we discussed how business owners can start preparing for their eventual sale well in advance, smoothing the path toward a successful transaction. By planning ahead, owners avoid scrambling at the last minute, reduce the risk of value erosion, and retain the flexibility to choose between a fast exit or a longer, value-maximizing process.

Balancing Speed and Value

Owners facing urgency still have options to protect value if they approach the process strategically. Versailles Group has developed a disciplined approach that enables owners to move quickly while still protecting value.

The first element is efficient preparation. By anticipating the need for speed, sellers can work with advisors to prepare materials such as non-disclosure agreements (NDAs), confidential information memoranda (CIMs), and data room contents well in advance. This ensures that even under a speedy process, there is not much sacrifice in quality.

The second element is global reach. Versailles Group’s experience demonstrates that the highest-value acquirers are often not local, and not even domestic. Accessing international buyers requires established networks and targeted outreach. Even under tight timelines, ensuring exposure to the right pool of buyers can mean the difference between a fair offer and a premium one.

Finally, disciplined process management ensures speed doesn’t become chaos. A well-structured process compresses timelines for indications of interest, management meetings, and due diligence, while still maintaining competitive tension. Done properly, urgency can create momentum rather than suspicion.

Meeting the Needs of Different Sellers

Ultimately, not every owner has the same priorities. For some, speed is the overriding priority, and a fair price achieved quickly may be the right answer. For others, maximizing value is paramount, even if it requires more time. Versailles Group has executed both strategies successfully and observes that most clients prefer an approach between the two extremes. Regardless, owners should make this decision consciously, with full awareness of the trade-offs. Selling quickly is not inherently wrong. What is risky is selling quickly without understanding what is being sacrificed.

Conclusion

Urgency is sometimes unavoidable when selling a company, but speed doesn’t have to mean sacrificing value. With the right preparation, process, and advisor, it is possible to sell efficiently while still maximizing value.

For business owners considering a sale, whether immediately or in the future, the message is clear: prepare early, understand the risks of rushing, and partner with the right M&A advisor to safeguard both speed and value.

Written by Donald Grava

Originally published: 14 July 2015

Last updated: 18 September 2025

Versailles Group, Ltd.

Versailles Group is a 38-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at

www.versaillesgroup.com

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

Why Versailles Group Recommends M&A Versus an IPO

Why Versailles Group Recommends M&A Versus an IPO

A business owner seeking to take advantage of his or her company’s value will often consider two options for cashing out—an M&A event or an IPO. Before commencing either process, the business owner should weigh the relative pros and cons of both options as they pertain to his or her goals. An IPO is a financing event that recapitalizes the company, while a company sale is a liquidity event. Thus, owners who truly intend on cashing out of their business would be well advised to pursue the sale of their company as opposed to an IPO.

Selling a company has less regulatory complexities and an accelerated timeline when compared with an IPO. An investment bank can help the company find the right buyer and structure the deal in the owner’s favor. For example, if the business owner is keen on receiving immediate compensation in the form of cash from a buyer, the M&A advisor can structure the deal in this fashion. In this way, a business owner can cut ties with the company upon closing a deal. On the other hand, the business owner can be awarded stock in the new company if he or she would like a continued interest in the success of the newly merged company. An M&A event provides flexibility with regard to the business owner’s future. Most importantly, however, M&A can be less costly and achieved more quickly than an IPO.

In contrast, an IPO fundamentally transforms a company from a private entity to a public one. There are numerous downsides and costs associated with this process of going public. First, there are some direct fees to execute an IPO: underwriter, legal, accounting, printing, and roadshow costs. Furthermore, the business owner is often required to retain his or her shares in the newly public company for a certain amount of time, referred to as a “lock-up period.” This precludes the owner from cashing out of the business right when the IPO is completed.

Following the IPO, the company incurs additional expenses to comply with the stiffer rules and regulations of a public company. For example, newly public companies often need to add employees to meet SEC financial reporting regulations and to comply with Sarbanes-Oxley. In short, an IPO requires more planning, preparation, and expenses than a company sale. Thus, a business owner can most effectively and efficiently cash-out of his or her business through a sales transaction rather as opposed to an IPO. Furthermore, once the business owner cashes out, he or she can diversify their investments. This is certainly not possible with an IPO where the business owner is, essentially, trading private shares for public shares.

Thus, to answer why Versailles Group recommends M&A versus an IPO, it’s relatively simple to see the advantages of a company sale over an IPO. Perhaps, the one big exception is where the owner sees tremendous growth and is willing to “suffer” a huge amount of dilution because the company is going to “explode.” The downside, of course, is that once a company is public, there is a large amount of pressure, every quarter, to show increasing revenues and profits.

Versailles Group is a Boston-based boutique investment bank. For over 28 years, Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

For more information, please contact
Donald Grava

617-449-3325

Should you sell your family business? How to decide.

Should you sell your family business? How to decide.

In our previous blog, we outlined some important reasons why entrepreneurs should consider selling their businesses (http://www.versaillesgroup.com/ma-deals-when-should-i-sell-my-business/). However, the decision to sell can be complicated by family considerations. Selling a family-owned business can be a difficult process for some, as these businesses often represent the culmination of years or even generations of hard work.

While many entrepreneurs aspire to pass on the family business to their children, doing so may not always be a feasible option. Under these circumstances, you should consider the possible sale of the business as it can provide you and your family with many benefits. Selling a company usually results in a large cash payout, which allows you to pay for your children’s college educations, enables you to retire, and provides financial security for your family. The financial security should not be underestimated. Most business owners have a majority of their net worth tied up in their business. A sale of the company provides them with an opportunity to diversify.

In summary, you should consider selling the family business if:

• No clear successor in the family: If you do not believe any of your children or immediate kin are qualified to run the family business, then selling may actually be the best way to secure their future. In some cases, your children do not have an interest in the family business and would like to explore different opportunities. In other cases, your children may lack the appropriate skills to properly manage the company. Either way, if these succession issues are not addressed, they can damage the value of the business and financial security of the family.

• The business is causing strain among family members: If managing the business is causing strains on family relationships, then selling the business outright may be your best option. A family business cannot run properly if personal relationships are distracting management. Under these conditions, it may be better to sell the company in order to reward the family with a large payout that will allow family members to pursue new ventures.

• You want to instill entrepreneurial values within your own children: As an entrepreneur, you may wish your children to experience the same discovery process that you did when you were building your business. However, passing on your family-owned company as inheritance may actually inhibit the development of these values within your children by depriving them of the opportunity to forge their own paths through life. By selling the business, you can secure your finances for retirement, preserve the legacy of your business if it is acquired by an experienced operator, and provide your children with the capital they will need to develop their own entrepreneurial pursuits.

For more information, please contact

Donald Grava

617-449-3325

The Problem With Business Value Calculators (And Why You Should Hire An Investment Bank Instead)

The Problem With Business Value Calculators (And Why You Should Hire An Investment Bank Instead)

If you’re a business owner interested in selling your company, it’s likely you’ll be tempted to use online tools such as Business Value Calculators to help you figure out where to start. However, using these business value calculators can often be risky - these tools frequently provide misleading or outright inaccurate data that can seriously jeopardize your prospects for a successful sale.

The issues with business value calculators are numerous. At their essence, they lack the complexity of real life. In an actual M&A transaction, the final price that a seller receives depends on a multitude of multifaceted factors, including (but not limited to) the sellers financial statements, the condition of the seller’s company, industry conditions, macroeconomic market conditions, and perhaps most significantly, the preferences of the buyer.

As the adage goes, “garbage in, garbage out.” Business value calculators are designed to be quick and easy tools that anybody can use, meaning that they avoid complex and difficult data. But without sophisticated data, these calculators can’t give you sophisticated results. Instead, most calculators simply ask for your company’s industry and its EBITDA (earnings before interest, taxes, depreciation, and amortization. (EBITDA is, oftentimes, used as an approximation of cash flow.) With that minimal data, the business value calculator quickly makes an educated guess based on industry averages. Unfortunately, this method is only accurate if you happen to be selling the most average firm in the world, to the most average buyer in the world, during the most average economic conditions in world history. Therefore, in almost all cases, the results of business value calculators will only mislead you either into a false sense of security due to overvaluation, or into a false sense of defeat due to undervaluation.

To be fair, business value calculators can be useful if you run a particularly small business (e.g., less than US$5 million in annual revenue), where minor differences in valuation are just that, minor. If your business is larger, a minor undervaluation could mean that you’ll lose a million or more dollars. In fact, it’s exactly in these sorts of situations that you may want to consider hiring an M&A advisory firm. Even for small business owners, representation by a boutique investment bank means that you’ll receive an accurate valuation for your company, and therefore be in the strongest possible position when price negotiations begin with potential buyers. The investment bank will also know how to push the valuation to its maximum.

Versailles Group is a Boston-based boutique investment bank. For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.

For more information, please contact

Donald Grava

How To Sell A Business For Maximum Value

How To Sell A Business For Maximum Value

Every business owner wants to know how to sell a business for maximum value. Perhaps the first step is to understand the most important metric that a buyer will use in valuing your company.

All entrepreneurs interested in selling their company will hear the acronym “EBITDA” (short for “earnings before interest, taxes, depreciation, and amortization”) being tossed around. EBITDA is a popular valuation metric that is usually calculated to approximate a company’s “free cash flow.” To find your company’s EBITDA, all you need to do is take its net income, then add back interest, taxes, depreciation, and amortization.

If you’re selling your company, however, you should be wary about over-relying on EBITDA calculations to determine the value of your company. While popular multiples such as Enterprise Value divided by EBITDA can provide basic insights into the relative value of your company, at the end of the day, such multiples are never the be-all, end-all of valuation.

The EBITDA metric itself has many shortcomings and limitations. Sophisticated buyers are acutely aware of these issues and it’s the major reason why entrepreneurs sometimes have trouble understanding why a professional buyer will place a lower value on their company than the simple EBITDA times a multiple that the entrepreneur used.
Professional or sophisticated buyers prefer to value a company based off its true free cash flow, which represents the amount of cash a company produces that is immediately available to shareholders and debtholders.

While EBITDA is often compared to “free cash flow,” in reality, the two metrics are actually calculated somewhat differently (both are based on EBIT, or earnings before interest and taxes). To recap,

EBITDA = EBIT + Depreciation + Amortization

whereas,

Free Cash Flow = EBIT * (1 – tax rate) + Depreciation + Amortization – Changes in Working Capital – Capital Expenditures

As you will note, there are three main differences between the metrics: Free Cash Flow includes
Taxes
Changes in working capital
Capital Expenditures

Taxes, working capital, and capital expenditures are important to the well-being of a company, yet EBITDA completely ignores these items. This is the fundamental problem. EBITDA is only an accounting metric, which cannot accurately represent how much free cash flow your company actually produces. And, it’s true free cash flow that drives the value for your company. Sophisticated or professional buyers aren’t seeking a return on their investment in EBITDA, they want it in cash or free cash flow.

Thus, an entrepreneur that is interested to sell a business for maximum value should recognize the difference between EBITDA and true free cash flow. For many businesses, these two numbers are completely different.

For over 28 years, Versailles Group's skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world. Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.
For more information, please contact

Donald Grava, Founder and President