Business Acquisition Protocol and
Business Valuation Matrix

Transaction structure and financial requirements will vary depending upon the size and type company involved.  Businesses can be divided into four classes.  Definition of Earnings, usual Price/Earnings ratios and Terms of Sale vary by classification.

Wall Street
Usually Public or very large private companies.
  Earnings:                         Measured in Millions
  Earnings Definition:          After Tax Earnings
  Price/Earnings Ratio:       10x to OMG*
  Usual Terms:                   Cash or equivalents
  * Oh my GOD!

Middle Market
Generally Private companies with well defined Corporate structure.
  Earnings:                       $500K to Low Millions
  Earnings Definition:        EBIT , EBIT-D, EBIT-DA to After Tax Earnings
  Price/Earnings Ratio:      3x to 15x
  Usual Terms:
       Down Payment:        Equity of 1 to 2x Earnings to all Cash
       Plus:                         Bank note(s) and owner financing   

Companies that represent a "Strategic Fit" usually will be valued and sold using "Wall Street" protocol. When a strategic reason for purchase is lacking, "Upper Main Street" methods are generally employed.              

Upper Main Street
Private companies with Corporate structure developing.  Owner has delegated many functions to others.
Earnings:                          Usually under $500K
Earnings Definition:           Adjusted EBIT or EBIT-DA, Sometimes EBIT and EBIT-D are used                       
Price/Earnings Ratio:       3x to 7x
Usual Terms:
       Down Payment:         Equity of 1 to 2x Earnings
       Plus:                          Owner financing - limited bank involvement

Main Street
Commonly refered to as "Mom and Pop" businesses.  Owner wears "all the hats."  
Earnings:                         Usually under $100K
Earnings Definition:          Discretionary Earnings            
Price/Earnings Ratio:       1x to 4x
Usual Terms:
       Down Payment:        80% to 120% of Earnings 
       Plus:                         Owner financing - Bank financing is rare

Definition of Terms:
EBIT  =  Earnings Before Interest and Taxes
EBITD = Above plus Depreciation
EBIT-DA = Above plus non-recurring and discretionary expenses
Discretionary Earnings = EBIT-DA plus Owner's Compensation

Note: Down payments or equity investments may exceed the levels indicated when inventories and other current asset values are high.

This article has been condensed from "In and Out of Business... Happily.

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