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Value: John Warrillow

Fat multiples are for the few Add to ...

Last week, JPMorgan Chase & Co. announced it would offer individual investors the chance to buy into a new fund being established to invest in emerging social media businesses. Its goal is to find the next Groupon or Twitter.

The JP Morgan Chase initiative comes on the heels of Goldman Sachs Group Inc.'s invitation to its wealthy customers to buy a piece of Facebook Inc., estimated to be worth $50-billion (U.S.).

The bankers are lining up at the trough because there is good money to be made right now in flipping consumer Web businesses. After reporting just its first year of profitability in 2010, The Huffington Post was acquired earlier this month for $315-million – an astronomical six times revenue.

The $6-billion that Google Inc. offered Groupon late last year amounts to a valuation of 12 times Groupon’s 2010 revenue – which only goes to show you just how much money people are now paying for the next Facebook.

All of this can leave average business owners feeling buoyed by the prospect of selling their business for a fat multiple.

Sadly, the mergers and acquisitions world is becoming increasingly polarized, with a tiny number of venture-backed consumer Web businesses fetching multiples of revenue – and the rest of the business world slogging it out for scraps, relatively speaking.

In the face of this dot-com bubble 2.0, a decent old-school business in Canada, generating a million or two in pre-tax profit, is still trading for only four or five times earnings before interest, taxes, depreciation and amortization (EBITDA).

I’m not sure when business owners will start to get a little more than four times for their life’s work or when consumer Web valuations will implode, but I, for one, will be passing if the sales rep from JP Morgan Chase calls on me.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. He is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released in April.

 

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