đ§ What I Learned Last Week
Week ending Friday December 3, 2021
What I Learned Last Week curates the most interesting content relating to business acquisitions, operations, entrepreneurship, finance, and more. WILLW is a publication of The Business Inquirer.
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đ° Articles
Adam Coffey writes for Forbes about the three types of EBITDA from the point of view of the seller. The article walks through example scenarios for each of these to further explain their relevance. Generally speaking, in a healthy, growing business, adjusted EBITDA is higher than regular EBITDA, and pro-forma EBITDA is higher than both.
The Three Types Of EBITDA
There are three types of EBITDA: normal (or definitional) EBITDA, adjusted EBITDA and pro-forma EBITDA. As a seller, you should understand each type so you know how to maximize your businessâ value to the universe of buyers.
Normal EBITDA is relatively straightforward. It simply considers the numbers as theyâre reported without making any adjustments to those numbers.
Adjusted EBITDA, on the other hand, adjusts for expenses that were incurred that wonât occur again or are stated in the wrong period. For example, letâs say you implemented a software program to automate processes that used to be done manually. As a result of this automation, you laid off some employees, but you also gave each of them a yearâs salary as severance. That severance is a huge expense, and it lowers your EBITDA for the given period. However, you can raise your EBITDA to a normalized level by adding back those one-time severance expenses to your earnings.Â
Pro-forma EBITDA is another way to adjust EBITDA, but itâs unique in that it adjusts for things that will happen in the future. For example, perhaps you own a service company, and halfway through the year, you sign a large contract. While you only receive revenue from that project for six months this year, next year, you anticipate a full 12 months of revenue from it. You can adjust your EBITDA up accordingly and get buyer consideration for it as a result.
Understanding The Importance Of EBITDA When Selling A Business
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Enrique Quemada is Chairman of OnetoOne Corporate Finance Group (Intâl M&A Advisors) and wrote an interesting article on LinkedIn about the great risk/return profile of search funds.
The success of the Search Companies model is backed by the excellent returns obtained by more than 620 Search Funds created worldwide.
The $1.4 billion of capital invested in the USA and Canada in traditional Search Companies and their acquired companies have collectively generated an average annual IRR for investors of 32.6% until the end of 2019, multiplying by 5.5 times the capital invested. In the rest of the world, the average annual IRR for Search Companies is 28.7%.
The astonishing profitability of the Search Funds
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Corporate Finance Associates Worldwide (name reminds me of Step Brothers movie, right?) published a report on the M&A activity in the transport, logistics, and supply chain sectors. The report talks about market trends, valuations, and M&A activity.
The report below gives a good overview of the Fall 2021 M&A activity in the Transport, Logistics and Supply Chain Industry Sector. The global retail logistics market size was valued at $205.4 billion in 2020 and is projected to grow at a CAGR of 11.8% during the forecast period 2021 to 2028, as per research published by Grand View Research, Inc. The e-commerce retail logistics segment is expected to grow at a CAGR of 12.5% from 2021 to 2028 as per the same research. The increase in global trade activities, particularly in emerging economies, is driving up the demand for retail logistics.
Fall 2021 | M&A Report In The Transport, Logistics and Supply Chain Industry Sector
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At DueDilio, weâve seen a lot of requests come through recently for due diligence of cybersecurity companies. Austin Dale Group has a short blog post on this hot market.
Cybersecurity has led an M&A bonanza in tech for several years, but 2021 brought a new bonanza in this hot sector. 451 research reports that during the first three quarters, there were 151 cybersecurity deals. The figure for 2020 was 94, with 88 in 2019 and 80 in 2018. While other technology sectors also saw increases in deals, few rivaled the increase in cybersecurity, where deal volumes jumped by more than 11%, with increases of 19.3% in cybersecurity software.
The massive changes the pandemic wrought, as well as increased awareness of cyberattacks, are fueling this change. Industry analysts generally think the changes are here to stay, at least for the foreseeable future.
CYBERSECURITY AN INCREASINGLY HOT SECTOR FOR TECH M&A
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MidStreet M&A writes about the cost of a business valuation. Legal valuations tend to cost $10k - $20k while fair market valuations can cost nothing (if done by broker) to a few thousand dollars.
How Much Does a Business Valuation Cost?
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Amazon seller valuations have doubled since the start of 2020 according to Marketplace Pulse.
According to Marketplace Pulse research, Amazon private label sellers are getting acquired for SDE/Adjusted EBDITA multiples of 4x - 8x, plus an earn-out that could bring the total valuation north of 10x. At the start of 2020, average valuations were starting at 2.5x - 3x.
Amazon sellers typically get acquired for multiples of Sellerâs Discretionary Earnings (SDE), which is a sort of an Adjusted EBDITA or annual net profit in rough terms, including add-backs of certain expenses. A business with $1 million in revenue and $250,000 in SDE profit would typically receive offers of more than $1 million guaranteed payment (4x the SDE) plus earn-out payments.
Amazon Seller Valuations Have Doubled
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As we wrap up 2021 and start planning for 2022 most of us are thinking of how to accelerate growth and revenue. Kyle Poyar wrote a good summary of the main drivers of growth for SaaS businesses (but really any business). Nothing new here but this is a good reminder.
Attract great talent
Get more from your existing customers
Explore untapped revenue streams
How to accelerate growth in 2022
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Crunchbase published an article on how to find a job once your business has failed. It happens, no shame in it.
Youâre also not the only one whoâs found themselves going from running a company to looking for a job. Startup failure is common: Around 1 in 3 seed-funded startups based in the U.S. between 2011 and 2018 raised post-seed funding, per Crunchbase data. That means a significant number also failed or fizzled out.
Your Startup Failed And Now Youâre Looking For A Job. Hereâs What To Do.
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underscore.vc has a good questionnaire you can use to vet potential VCs. I think this can be used for any type of investors and not just VCs.
You might have heard the saying, âA startupâs relationship with a VC is like a marriage,â given SaaS companies take an average of nine years to exitâlonger than the average US marriage.Â
You donât want to enter into the wrong relationship. Just as investors do their due diligence on potential investments, founders must do their due diligence on potential investors.
Thoroughly Vet Potential VCs With This Questionnaire
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David Spinks writes a guest post in Lennyâs Newsletter about community. This is the best post Iâve seen about community building. Admittedly, Iâve been failing at fostering community inside The Business Inquirer Facebook Group. This is really a great read on the topic of defining, building, and scaling a community. This is a post Iâm bookmarking.
A founderâs guide to community
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Empire Flippers just released their Q3 report that provides a deep dive into the marketplace activity. Really love the transparency here. In terms of the actual data, itâs what you expect. Volume and price are up and to the right.
2021 Q3 Report â July, August, September
𧾠Twitter
Keep an eye on CAPEXâŚ
Kinda agree. Dropshipping is a great first business to start and learn from IMOâŚ
Get those âbusiness interestsâ numbers upâŚ
Interesting thread on some economic differences between US and Europe. This stat in particular is đ¤ŻâŚ
Great thread outlining the simple steps that anyone can followâŚ
This one is worth saving as a cheat sheetâŚ
Not clear if this is a beauty contest or last nightâs Boston SMB meetup. You be the judgeâŚ
đ¤ Thoughts & Commentary
Unfortunately, Iâm running out of space in this weekâs newsletter so Iâll just highlight two interesting and free webinars that are coming up that you may want to register for:
đ Tools & Resources
These are tools & resources that I personally use or have used. They may contain affiliate links so Iâll get a few pesos if you sign-up.
ProjectionHub - Access to 50+ CPA-developed financial projection templates. 25% discount using code âduedilioâ at checkout.
BizNexus - Proprietary deal flow, deal aggregator, and exit prep.
PrivSource - Deal aggregator for lower and middle-market listings.
Logology - Best automated logo & brand identity tool Iâve come across.
DeepBench - Access a cutting-edge expert network. $200 discount.
OpenPhone - The best business phone solution that I have found. $20 credit.
Eloquens - Knowledge marketplace. Iâve bought a few guides and templates here.
Deal Flow Scout - peer-to-peer deal flow exchange. Free, open, transparent.
Thatâs all for this issue of What I Learned Last Week!
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Important Disclaimer: This newsletter is provided for informational & educational purposes only, and should not be relied upon as legal, business, investment, or tax advice. This newsletter may link to other websites and certain information contained herein has been obtained from third-party sources. While taken from sources believed to be reliable, it has not been independently verified. The Business Inquirer makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. References to any companies, securities, listings, investments, or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any business, tax, or investment decisions. Content in this newsletter speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.