Maximise your business's value with multiple arbitrage

As a business owner, you’ve probably considered selling your company – whether as part of your long-term plans, retirement goals, or the sheer frustration of running a business. Regardless of your reasons for wanting to sell, you’ll be keen to get the highest valuation possible so you can gain the most from selling.

One key strategy to consider when developing a plan to sell your business is Multiple Arbitrage.

You might not be familiar with the exact meaning of the term but as a strategy frequently used by private equity firms and strategic buyers who create their wealth through consolidating businesses to create valuable, larger companies, you can be sure that it is worth considering.

So what is Multiple Arbitrage and how does it increase the exit value of your business?

Multiple Arbitrage is the process of acquiring smaller businesses into your business to increase your valuation. When you buy a business with lower EBITDA multiples, and combine it into your business, your overall multiple is higher than that of the two businesses alone. Selling this combined business is therefore a great way to increase the profitability of the sale. Generally, multiple arbitrage takes advantage of price differences in two or more markets.

How does Multiple Arbitrage matter?

EBITDA multiples is the metric often used by potential buyers when they evaluate a business. For a better understanding of EBITDA, take a look at our webinar here. In these circumstances, smaller businesses sell at a lower multiple. Conversely, larger, established businesses sell for higher EBITDA multiples due to the lower perceived risk.

If you are able to position your business as an attractive target for acquisition – either as a standalone business, or as larger roll-up strategy – you will potentially be able to increase the sale price to above the EBITDA valuation.

5 ways to maximise your business’s value with multiple arbitrage:

If you are planning on selling your business and have time to put a plan in place, here are our suggestions for capitalising on Multiple Arbitrage:

1. Focus on growth before selling

A business with higher revenue and EBITDA is, clearly, a better option for a buyer. Focus on developing your business through organic growth or expansion by strategic acquisitions and you’ll move your business into a higher EBITDA multiples range and attract a higher selling cost.

2. Merge

A relatively straightforward way to grow before selling is to merge with another similar company. Done well, your combined EBITDA will lift you to a higher multiple category making buyers more willing to pay a better price.

3. Positioning

Larger businesses/corporations look for small entities that they can easily incorporate into their current operations. By positioning your business as a good acquisition for such organisations, you’ll be able to attract a higher offer price.

4. Financials

Get your financials sorted and your business will become an attractive target for those businesses looking for multiple arbitrage opportunities. That means tidy up your books, strengthen your margins and focus on a strong cash flow. Our Fractional Finance Directors are perfectly placed to help with this.

5. Get advice

Mergers and acquisitions are a complex and specialist area. To maximise your valuation and to identify possible multiple arbitrage buyers, it pays to take advice from a specialist.

An example of Multiple Arbitrage:

Let’s say that your contract cleaning company generates £3 million EBITDA and your business is valued at 5x EBITDA (i.e. £15 million total valuation). To gain a stronger valuation before selling, you acquire a number of other smaller companies in a fragmented industry with a combined EBITDA of £1m and with the same multiple. The combined EBITDA is then £4m but the multiple may then increase to, for example, 6 times giving a combined valuation of the total business of 6 x £4m = £24m.

This potentially significant increase in company value is achieved without having to spend years growing the business through organic means.

Key Takeaways for Business Owners Looking to Sell

Smaller businesses often sell for lower multiples, while larger businesses command higher valuations. Grow your business before you sell: merge or position yourself favourably to buyers who use multiple arbitrage and you’ll dramatically increase your sale price.