IE Business Daily Business news for the Inland Empire.
By Edward L. Fixen
Almost all business owners wonder what their business is worth. The actual amount that a particular business sells for depends on many factors unique to that individual business such as historical stability, profitability, growth, industry, customer base, etc. However, it is always a good idea to keep an eye on trends and general benchmarks regarding businesses valuation multiples in your industry.
The following table shows median values for market-based business valuation multiples for the sale of privately-held businesses by industry for the last three years. A common market-based valuation multiple as shown in this table is Sell Price as a multiple of EBITDA (Earnings before Interest, Taxes, Depreciation & Amortization). EBITDA is a commonly used financial metric to measure the earnings of a business. For example, a retail business with EBITDA of $1 million with a price-to-EBITDA multiple of 2.50 would sell for $2.5 million.
Another common valuation multiple not shown in the table below is Sell Price as a multiple of Revenue. Market-based valuation multiples and the results summarized below are derived from the actual sale price of privately-held businesses purchased by private buyers (i.e., excludes acquisitions by publicly traded companies) over the past 3 years.
There are several interesting observations that can be drawn from this data. Manufacturing and wholesale businesses generally sell for a higher value compared to the other industries. The retail trade industry has consistently sold for a lower value compared to other industries.
With respect to trends, the median EBITDA valuation multiple for the transportation, wholesale and retail industries have consistently increased over the past three years. Conversely, construction is the only industry that has steadily decreased over the past three year years, falling from an EBITDA multiple of approximately 4 to 3. The data in the table above would be even more meaningful if it were further stratified or categorized based on annual revenue/sales because in general, businesses with sales over $5 million sell for a significantly higher valuation multiple than businesses with annual sales of $1 million or less.
However, buyers and sellers beware! Any statistic, including median valuation multiples, should be viewed as a statistical benchmark or reference point but nothing more. For example, the fact that the median manufacturing business sold for 4.22 times EBITDA in 2014 only means that 50% of manufacturing businesses sold for less and 50% sold for more. The actual value of any business will be highly dependent on the unique characteristics of that business and will more than likely either be higher or lower than the median valuation multiple. By how much depends on the how the company compares to its industry in terms of profitability, growth and many other factors.
Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid size, privately-held businesses throughout California and can be found at www.BusinessQuestInc.com.
