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Thesis Options for an M&A Offering Document

Your offering document for proposing an M&A deal needs to have a thesis: an argument of the Buyer’s opportunity should he choose to complete the deal. Here are four options you could use for your thesis:

Gross profit thesis

Very simply, the gross profit thesis asks Buyer to value the business based on the gross profit (revenues minus the cost of sales). This thesis is similar to the contribution margin and in some cases may be exactly the same. In this approach, a 5X multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) is probably out of the running, but a 1X or 2X multiple may be possible.

The gross profit thesis may be a suitable solution for another problem: structuring an earn-out.

Top line revenue thesis

As simple as it gets: This thesis is a valuation based on top line revenue (gross revenue). Similar to the contribution margin thesis, Buyers probably won’t pay 5X EBITDA; a 1X multiple is usually a pretty strong valuation.

The top line sales thesis makes a great way to measure an earn-out.

Asset value thesis

Instead of basing the valuation on some sort of measure of cash flow, asset value thesis uses the value of assets. This type of valuation is another way to create value for a profit-challenged company.

Strong customer base thesis

This thesis moves out the realm of measureable accounting results and firmly places you in the touchy-feely, “gosh darn it, people like me” world of intangible valuation techniques. So burn some incense, put on your Ravi Shankar LPs, and dig it, man!

With this thesis, Seller is asking Buyer to consider the strength of the customers. Strength can mean both size/purchasing power of the customers as well as the point of entry to the customer — the higher up the corporate food chain, the more valuable the relationship.

A Seller who has C-level contacts (folks with Cs in their titles, such as CFOs) has more-valuable customer relationships than a Seller who sells to low-level associates.

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