Lies, damn lies and statistics
I had cause to be looking at the data we track on M&A activity in this sector and did a quick analysis of profit multiples of a pool of recent transactions. Now it would be all too easy to report a simple number here and leave it at that. I could just boldly state that the average multiple for transactions thus far this year is 12.4. However, I would be misleading you if I left it there – I have not even told you what profit level (as it happens this was a selection where EBITDA was reported) nor have I qualified the data.
Here at Prism we frequently warn about the “myth of the multiple” – numbers that are bandied about as if they are gospel, and more disturbingly, delivered in a way that is intended to make you think they must also apply to you without a second thought to the logic therein.
If one takes a second look at my data again one would see that the range goes from a rather paltry 1.8x to an enviable 48x – but the median value (frequently a more reliable indicator) is 10x. OK, so does this figure now apply to you? Well no, probably not. For starters the median transaction size was over £13m but more significantly we need to look at what comprises the consideration figures. In this data set the consideration figures included maximum earn-outs. Thus the actual multiples ultimately achieved will invariably come in lower as most earn-outs do not pay out in full.
But there is still one glaring omission to my explanation as to why you should be very cautious when extrapolating general multiples to your business. That being the uniqueness of your business. OK, so my figures are all from ICT businesses and, as I have indicated, cover a wide range of sizes, but also cover a very wide range of activities, business models, structures etc. The only way to value a business is to really understand it. If anyone tells you there is a “standard multiple”… well you probably know my views by now!
An article by Robert Fiske, Director of Corporate Finance at Prism