Determining the value of your business is an important question whether you are thinking of selling your business now or in the future. Business valuation can be calculated a number of ways, however when it comes to selling your business, it is the value deemed by buyers that counts.
Determining Business Value – More Than Numbers
Business valuations are determined by a number of factors and how these factors are considered varies by buyer. Here are the key factors that affect business value in the eyes of buyers:
- Cash Flow – The number one determinant is income or owners cash flow. This may not be the income showing on a tax return but rather comes from an understanding of the true income potential. Generally this includes the following: net income, interest, depreciation, amortization, excess owner salary and benefits and one time extraordinary charges. Buyers will quote offers as a multiple of this number, usually known as adjusted ebitda.
- Management and Staff – If an owner is a key person in the business and they plan on retiring soon, the presence of management to step up into the owners role is an important consideration especially for financial buyers. Even strategic buyers may consider this to be a key item.
- Trends – If sales and income are trending steady or up, the company will generate better offers than if either of these is going down.
- Customers – a customer list that includes high profile companies as repeat customers may attract extra attention even if other parts of the business are not in good shape. Low customer concentration is also very desirable. High concentration, with one customer at more than 50% can deter some buyers, however finding the right buyer can sometimes mitigate this concern.
- Intellectual Property – patents, unique technology and other key knowledge based factors can increase value significantly especially if these provide a competitive advantage.
- Capital Investment Requirements – does the business require large infusions of capital spending every year or are these expenditures relatively low and infrequent. Generally valuations adjust based on these needs.
- Size – most buyers in the small and middle markets will discuss multiples of ebitda for valuation. In the same industry, a business with $300,000 of ebitda might be valued at 3x ebitda while another business with $1 million of ebitda could be valued at 4x or 5x ebitda. larger businesses are considered less risky thus the valuations tend to be higher.
- Assets & Liabilities – while most valuations are based on cash flow, things like accounts receivable, inventory, fixed assets, accounts payable and debt can all impact value and have a significant impact on negotiations, terms and taxes.
- Industry – an industry with lots of potential will have higher valuations due to expectations of future growth. High tech electronics is one example. Stagnant or declining industries such as retail businesses will have lower valuations.
- Professional Representation – a business represented by a professional broker or M&A Advisor should generate multiple buyers, offers and term options which tend to increase business selling prices. Independent studies and BMI’s own data support this conclusion. For furher information see:
Review-shows-BMI Generates 40% Better Offers
Does Hiring M&A Advisers Matter for Private Sellers? Agrawal, Cooper, Lian, and Wang. Agrawal: Culverhouse College of Business, University of Alabama
Market Multiples for Valuations Based on EBITDA
Determining a range of multiples of ebitda that buyers will likely offer, as noted above, depends on the size of the business and the industry. Typically in deals valued between $1 and $50 million the multiples range between 3x and 6x ebitda. Each business situation is different which is why historical multiples range from 1x to 40x. The table below shows ebitda multiples for companies in four industries with ebitda between $500,000 and $5 million.
Industry | EBITDA Range (Earnings before Interest, Taxes, Depreciation, Amortization) | Median EBITDA Multiple | 10th – 90th % Range EBITDA Multiple* |
---|---|---|---|
Manufacturing | $500K – $5 mil. | 5.1x | 2.6x – 24.9x |
Wholesale Trade | $500K – $5 mil. | 4.6x | 2.6x – 11.2x |
Software & IT | $500K – $5 mil. | 17.6x | 3.9x – 202.1x |
Construction | $500K – $5 mil. | 3.6x | 1.8x – 7.4x |
*10th-90th % range is low to high ebitda multiple excluding the lowest and highest 10% to eliminate outliers. Source: Business Valuation Resources LLC
Providing more specific data here is not practical however, BMI has access to 44,000 private and public company transactions in almost every industry. Using this extensive data, we can provide a reasonable range for your industry and size business. Applying the non-financial factors above yields a comprehensive assessment of your companies value in the eyes of likely buyers.
Business Valuation Methods
Learn about the basic methods for valuing businesses for sale.
Why Provide a Free Business Valuation and Assessment?
Selling a business can be a big decision and business owners need to have this information to make an informed and thoughtful decision. The business sale process will be smoother and more productive if we have a common understanding of your business value. Applying our market knowledge BMI provides a probable range of values you could expect to see in a business for sale transaction. The advantage of this complementary assessment of business value is that it allows business owners to focus on key decisions. Decisions such as the timing of a sale and what areas of a business may need some improvement to maximize value.
Of course, this free business valuation is provided with no expectations on the part of BMI. We enjoy talking with business owners and welcome the chance to speak with you. Contact Tom Kerchner or Dave Clark for your free opinion of business value or a simple confidential conversation. (610-777-7029 or 215-240-7648).
Confidential and Complimentary
We understand confidentiality is very important. Any discussions with us concerning your business valuation are kept strictly confidential. The information gathered or shared is used only for providing to you a range of probable business values in a business sale transaction.
Formal Business Appraisal
There are times when a formal business appraisal is needed. Often these relate to issues other than selling a business. BMI can refer you to a professional business appraiser appropriate for your situation. Call us at 610-777-7029 to discuss your needs.