Learn how multiples are determined and discover why some businesses enjoy much higher ones than others.
In our daily conversations with business owners about the value of their enterprises, we've found that perhaps the most common area of interest—and sometimes confusion—is the concept of valuation multiples. Many business owners know that multiples play a crucial role in calculating the financial worth of a business, yet they don't fully grasp where exactly the multiple comes from. Unfortunately, there are too many business brokers out there who apply a multiple to a business valuation without offering any explanation to the seller as to why the multiple is as such. We're not that kind of broker.
Believe it or not, we actually want you to understand how your business multiple is determined! That's why we spent an entire episode discussing exactly this topic. How's that for transparency?
For now, we'll assume that you understand where the multiple appears in the valuation formula. If not, check out the aforementioned episode for more clarification.
Results May Vary
The first thing to understand is that multiples are deeply impacted by the industry in which a business operates. "Each industry has its own range," notes Chandler. "A sector like home services may start at multiples of 3.5 and can go all the way to 5, while the e-commerce industry might see multiples ranging from 6 to 12."
Naturally, variation exists because different industries have different levels of risk and growth potential. To accurately determine the multiple used in your business valuation, we begin by acknowledging the accepted range for your specific industry.
It's also essential to recognize that these industry standards are by no means permanent. Economic shifts can dramatically alter these ranges. Chandler points out that while "the range for home services... might be 3 to 5, we might be entering a different place for the economy and that range may change." External factors such as interest rates, inflation, and even unemployment rates can affect the multiples applied to business valuations.
Unfortunately, most of these things are out of your control as a business owner. But there are some things you can strive for if you want to get a higher multiple for your valuation.
Set Yourself Apart
If you've been in business for quite some time, that's good news! The longevity of a business significantly contributes to its perceived stability and, by extension, its valuation multiple. A company with a track record spanning decades is often seen as more stable and less risky compared to a newer market entrant.
"A business that's been operating for 20 years is going to get a higher multiple," explains Joe, "than one that's been operating for 2 years." Proven operational stability and established market presence go a long way to reassure potential buyers of a company's viability.
Another indicator of a higher multiple: minimal owner involvement. The structure of management and the presence of a competent team play a critical role in determining the multiple. A turnkey operation where the entire team is already in place will command a higher multiple due to the ease of transition for prospective buyers. Joe describes these deals as "switching the jockey, but keeping the same horse."
So, Is It A Science Or An Art?
Both! While there are standard ranges for different industries, there is no strict rulebook for determining a business's multiple. "The valuation is as much an art as it is a science" Chandler argues, "It’s not just based on a whim, nor is it just based off of a written rule... which is why you should have an expert."
At Robbins Pellegrino, we're committed to not only helping you understand where multiples come from, but also providing you with the multiple that your business truly deserves. Contact us today for an honest and fair valuation of your company. You might be surprised by the multiple your business can sell for.
About Robbins Pellegrino: Robbins Pellegrino is a Florida-based business brokerage firm led by Chandler Robbins and Joe Pellegrino, Jr. that is committed to redefining industry standards. We focus on creating meaningful partnerships and ensuring successful business transitions for both buyers and sellers. For more information, visit us at www.robbinspellegrino.com or call (239) 360-6273
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