Are Prices Increasing for Educational Businesses?
We are experiencing great demand for high-quality businesses in our industry and noticing an increase in competitiveness for attractive acquisitions—especially multi-site operations. Recently many owners are asking us about whether the multiples being paid for businesses are increasing. And the answer is yes! However, there is a much more important question to ask—what number is the multiple based on? The education industry has historically been a 3-5 multiple industry for companies having one to five sites. As a reminder, that the multiple is the number that the annual cashflow projected forward for 12 months after acquisition is multiplied by to get the business value. We call this the go-forward cashflow. This business value includes the equipment and vehicles used in the business as well as the goodwill associated with the current business operations. In the last 18 months, we have been more aggressive about pricing and are finding buyers rising to the challenge!!
The most important question though is what is the “go-forward cashflow” that the multiple is applied to? This begins with the most recent rolling 12 months performance of the seller and is adjusted for expenses that the acquiring operator will not incur, such as the current owner’s personal expenses, as well as some that the successor operator will incur, such as a change in rent or benefits. Maximizing the go-forward cashflow is a much more important process since it is the basis of the valuation calculation.
At Hinge, we work hard to position the numbers in a way that is aggressive for our sellers while staying within the tolerance level of buyers. It is our preference to begin working with potential sellers long in advance of a sale so that we can make suggestions to maximize value and keep them informed of market changes so that we take advantage of changes in buyer demand, working with many for 2-3 years in advance of a sale.
We are happy to complete a confidential, complementary valuation and help you to develop a plan that will boost the valuation for a successful sale.