Why the 3 X EBITDA calculation is flawed:We are in the middle of a deep recession. Not just any old recession, a pandemic driven recession. Something that uniquely impacts the way we live our lives and is very visibly wreaking destruction on our high streets and large swathes of our economy. A downturn with a set of circumstances that have no clear end point and where the rules and approach from our leaders are changing regionally and nationally on an almost daily basis. Presently, all four home nations of the United Kingdom are at different stages of COVID related lockdowns.
Amidst all this uncertainty and chaos it would – at least on face value - appear to be a logical conclusion to assume that practice transfer values and deal terms are much worse now than they were Pre-Covid. Yet, the reality is vividly and very positively different. The optical practice sales market is extremely busy right now, even in the face of lockdown. We appear to be in the eye of a perfect storm and instead of the doom and gloom that one would expect, deal fever abounds.
“The reality of the current market for UK independent market is that practices typically change hands for between 2 and 8 X EBITDA”
Like any other market – the practice sales market requires motivated parties on both sides of the equation:
So what is going on?
On the selling side, the current main catalysts for sale are:
- The perceived danger/risk to health or even life for older owners
- The fear of the unknown and uncertainty – many owners are cashing in now, or hedging their bets with a part sale to take some money off the table.
- The discomfort and challenge of operating a practice in Covid-19 conditions, whilst the high-street around them crumbles
- The herd instinct: “everyone else seems to be selling up and getting out – or at least selling some equity - so maybe I should too whilst the going is good.”
On the buying side the players come in different shapes and sizes:
- Large acquisitive groups backed by external investors and awash with cash racing for market share and looking to capitalise on fear and uncertainty in the market. This has led to unprecedented levels of mergers and acquisitions, including joint venture offerings - a hybrid solution – which for some may potentially be the best of both worlds – but only if the seller receives genuinely fair value at the deal stage. [more about this in a minute]
- Smaller players seeking to expand; or alternatively to purchase any local independent competition that may be available – primarily for defensive reasons (i.e. to keep the multiples (mentioned above) out of their patch.)
- First time buyers. The first time buyer market is more active than we have seen for well over a decade. We believe this is down to a combination of:
- The new “no money down” business purchase methodology pedalled by Jonathan Jay [and imitators] encouraging would be buyers to bag themselves a “no risk, no money down bargain” under the auspices of tax savings and other justifying rationale.
In the cold light of day, it should be pretty obvious that allowing a “would be buyer” to provide you with a “valuation” and “exit planning advice” is probably not going to be the most sensible course of action to get you the best outcome. However many of the most proactive would be acquirers are extremely sophisticated and persuasive in their dialogue and carefully crafted sales funnels. For more details on this and what to watch out for, check out our separate article: How to avoid your optical practice being farmed by a purchaser
Question: What is your optical practice worth right now?
Answer: There is no single hard and fast rule on this, but it is highly unlikely to be 3 X EBITDA calculation that proactive purchasers will seek to tell you is the norm. To help illustrate this, recent deals achieved by Myers La Roche during the Covid pandemic range from a little over TWO times EBITDA to as high as EIGHT times. It is also important for owner to understand that most of the deals Myers La Roche are currently agreeing are 100% cash on completion – NOT staged payments.
Conclusions & What to Do Next
“Saving” yourself money by avoiding the use of a cutting edge, market leading broker suddenly does not hold quite the same appeal does it, if it is actually going to costs you a net balance of tens of thousands in the overall walk away deal terms?
There is NO secret sauce, but the proof is very much in the pudding
Check out our recent case study and testimonial to see the full benefits of structured exit planning.
Check out our article “What is the difference between a good deal and a great deal for your practice sale” for another very current case study in which we achieved a deal value over £90k higher for a client who was approached directly by an acquirer and did not realise the true value of their enterprise.
Needless to say, both parties found engaging our services to be highly valuable with an irrefutable ROI.
To find out more about how we can help, please get in touch to arrange a free and 100% confidential initial consultation via:
Telephone: 0161 929 8389