Multiple of Earnings Valuation for IT support and telecoms businesses
So far in our E-Tutorials to-date, we have looked what drives sales, mergers and acquisitions of IT support and telecoms businesses and the motivations of both buyers and sellers. Now we will look at the first of two theoretical methods of assessing the value.
Method #1: Multiple of Earnings
The multiple of earnings valuation is the most universally used valuation method and is often the point of reference for other valuation techniques.
The valuation is based on the earnings that a buyer will be able to extract from the business before interest, tax, depreciation and amortisation (EBITDA) and any other costs incurred by the company that the buyer would not incur post acquisition. The valuation of the business is therefore a function of the adjusted EBITDA and a multiplier.
The multiplier will in most cases depend on the size of the business, the larger the business turnover the higher the multiple. For example and as a very rough guide the multipliers for a typical IT support and telecoms business are as follows:
£150k to £400k
2 to 3
£400k to £5m
3 to 5
£5m to £10m
4 to 6
The earnings “adjustments” will depend on the buyer’s own set-up and the strategic cost savings that can be made. As a minimum the EBITDA will be adjusted to add back the seller’s remuneration less the cost to the new buyer of employing a replacement general manager/managing director.
A truly strategic buyer will be able to adjust the EBITDA further to take account of the cost savings on overheads such as premises, insurance, industry membership subs, advertising, IT systems costs, staff, accounting and legal. Whether the buyer will be prepared to share this upside with the seller will depend on the strategic benefits of the acquisition and the level of competition between buyers for the business.
Whilst buyers will tend to focus their valuation model on the past one or two years’ performance, it is important to produce a projection of the future two to three years’ revenues and earnings, particularly if the business is continuing to sign-up new customer service contracts which will deliver recurring revenue for some time to come. A tangible projection will enable us to justify and negotiate a deal value which reflects future earnings as well as the performance to-date.
Would you like us to assess the value of your IT support and telecoms business?
We would be delighted to offer you a free appraisal and indicative valuation of your business to give you guidance on its value and attractiveness to buyers, and whether now is the right time for you to sell. Our appraisal can take the form of either a face-to-face meeting or a telephone call, as you prefer.
Please contact us on 020 8090 9380, email [email protected].co.uk, or complete the form below to arrange an appropriate time to review your exit strategy and the value of your business in confidence and without obligation.