Business Valuation Multiples

Small Business Valuation

Multiples by Industry

Most Buyers will value a business they are considering purchasing by determining operational profitability. This requires every seller of a small business to provide accurate and historical financial information. To value a business, one must determine the EBITDA of your business. (Earnings before Interest, Taxes, Depreciation, and Amortization.) EBITDA is a financial metric that gives a preview of the company's performance. The acronym was first coined by billionaire John Malone in the 1970s to analyze the capabilities of telecom companies to generate cash. The table below shows both the typical minimum and maximum value multiples, giving a sense of the value ranges of businesses.

Financial Performance & Growth

Your company’s financial performance, coupled with growth are critical factors that will influence the appropriate EBITDA multiple. A higher multiple is used as it indicates that a company is both highly profitable and stable, while it has maintained a positive growth in sales.

Sustaining profitability over time is critical to maximizing the value of your business. A company’s consistent revenue growth has a material impact in determining its EBITDA multiple.

Example

A Logistics company has a reliable yearly EBITDA of $350,000. Applying the multiples outlined above it would be valued by a prospective Buyer at somewhere between $1,085,000 to $1,925,000, depending on the Financial Performance and Growth prospects as outlined above. (350,000 x 3.1 to 350,000 x 5.5).

Buyers are typically attracted to businesses that are trending upward or, through their efforts, can trend upward. Anything that can boost sales, reduce costs, and/or optimize the internal and external process will add value to the business.