Ask the Investor blog offers answers Featured

4:08pm EDT April 28, 2011
Dan Lubeck, founder and managing director, Solis Capital Partners Dan Lubeck, founder and managing director, Solis Capital Partners

Have investment questions? Of course you do.

Now, you have answers. Dan Lubeck, founder and managing director of Solis Capital Partners and contributing columnist for "Investor's Perspective" in Smart Business Los Angeles and Smart Business Orange County, has found his way to our blog. Last week, he debuted "Ask the Investor" by responding to some common investment questions that come up when buying and selling a company.

E-mail your investor questions to Dan@SolisCapital.com and his responses will be featured in future blog posts.

Q: Why is there so much focus on EBITDA by potential purchasers of my company?

The Investor says: At the end of the day, the most important aspect of value is how much cash a company will generate over time. EBITDA, or earnings before interest, taxes, depreciation and amortization, is an easy way for investors and purchasers to understand historical cash generation for most types of companies (except for those that require significant, recurring capital expenditures). The historical EBITDA often is a good indicator of what the future EBITDA will be.

Other critical factors include quality of leadership, ability to defend the niche, market dynamics, proprietary technologies or processes, contacted business and any other items that help assure future EBITDA. The investor or purchaser will value a company based on a multiple of EBITDA. Companies with the highest certainty of the fastest EBITDA growth typically will receive the highest multiple valuations. In addition to expected growth, companies with higher historical EBITDAs often will receive higher multiple valuations merely because of size. For example, a company with over $10 million of trailing 12-month EBITDA generally will fetch one times EBITDA more than a company with $5 million or less of trailing 12-month EBITDA.

Q: Should I hire a broker or investment banker to help me sell my company?

The Investor says: The answer to this question is “maybe.” The fees charged by intermediaries are significant. However, there are scenarios when qualified intermediaries can add value in excess of their fees. For example, if your company has performed well for the past two to three years, you want to sell most or all of it, there are a large number of potential buyers and/or you have no idea who the right buyer will be, a sale process run by an intermediary potentially can generate a much higher value. Another scenario is where the intermediary has particular expertise and experience in your industry, and there is “story” required as part of your sale presentation.

There are many scenarios where an intermediary will not add value. For example, if you know the one or two likely best buyers, then you should be able to maximize value with the assistance of an experienced transactional lawyer (which you need regardless). Another example is where there is significant risk to your business if the word leaks that you are selling. In this scenario, you are likely better off working with your experienced transactional lawyer.

We use intermediaries about half the time when selling our portfolio companies. Often it’s a good idea to seek the advice of your CPA when making this decision. If you decide that you need an intermediary, please do not base your decision on the firm name. Be sure that the individuals that will be representing your company (often not the senior partner that comes in for the dog and pony show) have the talent, experience, time and drive to get your deal done.

Q: Can I sell my company even if I have not made any profit the last couple of years?

The Investor says: You can always sell your company. The question is: Will you receive a value sufficient to satisfy your personal objectives? Although your historical EBITDA certainly is a factor, the value will depend largely on what EBITDA you can prove for the future. If, for example, you have landed large new contracts, you likely will be able to get value for most of the EBITDA that those contracts will generate. I suppose the tougher question here is: Why are you selling your company now? If you have no choice, then you should prepare the best you can, potentially hire a broker to help you tell the story, and get the best value possible. If you don’t have to sell now and you think the future looks better, you likely will get more value if you wait.

Dan Lubeck is Founder and Managing Director of Solis Capital Partners (www.soliscapital.com), a private equity firm headquartered in Newport Beach, CA. Solis focuses on disciplined investment in lower-middle market companies. Lubeck was a transactional attorney and has lectured at prominent universities and business schools around the world.