In a previous article we discussed how to use multipliers to determine the value of a business <LINK>. While many business brokers may have a general idea of what businesses are selling for in their area, it can be difficult for a single broker to obtain enough sales data to create accurate business valuation multipliers for your specific business category.
If you want to use an income multiplier to determine an accurate business value, there are two critical elements. First, you need to start with accurate standardized financial records. The financials records should be based on either the EBIT, EBITDA or SDE standards. You can learn more about them by reading our article Understanding EBIT, EBITDA, and SDE for Small and Medium-Sized Business <LINK>.
Second, the creation of the business valuation multiplier needs to be based on a pool of hundreds or even thousands of verifiable business sales. It is very difficult for brokers to create such a large pool of data. That is why many business brokers turn to a national resource called the Business Reference Guide. This guide is utilized by bankers, business brokers, accountants and others to price over 600 types of businesses.
What is My Business Worth?
All businesses are divided into classifications and then sorted into subgroups. Because each business classification has unique features, each business group will have their own industry business multiplier. We are going to provide some general data from the business reference guide. Please feel free to share this information with your business broker or accountant – if they do not already have access to this data.
Applying one or more business multipliers to the correct income stream is a very reliable way to get a general idea of how much your business is worth. I say general idea because unless you are running a franchise, most small businesses have unique features or conditions that may alter the general business value that was calculated using the multiplier. As we have mentioned before, the accuracy of the following data is highly dependent on the accuracy of your financial statements.
So, let’s take a look at the most common business multipliers. The following lists of business do not include any franchise establishments. Please give us a call or contact your broker if you need specific business pricing information for franchises.
|ACCOMODATION AND FOOD SERVICES||Net Sales||Gross Profits||SDE||EBITDA||EBIT|
|Bed and Breakfasts||0.79||1.14||0.55||1.25|
|Caterers & Catering||0.28||0.53||1.97||2.85|
|Hotels & Motels||2.40||2.85||8.19||11.54|
|Ice Cream/Yogurt Shops||0.51||0.86||8.07||10.05|
|Restaurants – Fast Food||0.39||0.06||3.03||2.94|
|Restaurants – Full Service||0.43||0.80||5.58||5.80|
|RETAIL TRADE||Net Sales||Gross Profits||SDE||EBITDA||EBIT|
|Auto Dealerships – New||0.22||1.87||8.32||9.36|
|Auto Dealerships – Used||0.11||0.59||1.38||1.76|
|Auto Parts & Accessories||0.46||1.19||2.58||3.85|
|Bed & Mattress Stores||0.41||0.92||2.41||3.57|
|Beer & Wine Stores||0.41||1.59||3.72||5.48|
|Carpet & Floor Coverings||0.23||0.70||1.86||4.03|
|Gas Stations w/ Store||0.14||0.72||3.07||2.97|
|Pharmacies & Drugstores||0.31||1.22||5.91||6.73|
|SERVICE BUSINESSES||Net Sales||Gross Profits||SDE||EBITDA||EBIT|
|HEALTH CARE & SOCIAL SERVICES||Net Sales||Gross Profits||SDE||EBITDA||EBIT|
|Adult Day Care||0.51||0.78||2.65||5.15|
|Children Day Care||0.55||0.64||2.56||4.32|
|Home Health Care||0.52||0.81||6.59||6.18|
What do you do with this data? Remember that this is a multiplier. So, once you have adjusted your financial reports to remove any one-time or non-business tax-related expenses, you take the correct profit amount and multiply it by the multiplier. It is a matter of best practice to calculate as many different multipliers as possible. This will help to verify your market value and establish a range of value.
What is a Range of Value?
Imagine you have listed your physical therapy business and 100 ready and willing buyers make an offer on the property within 30 days. Not all of those buyers are going to offer the exact same amount of money. Some offers are going to be low balled and others may be way too high because they have all sorts of ridiculous contingencies or have no idea what the going price should be.
But, around 80% of the offers should be within 10% of each other. That is the range of value. While you might run to take the highest reasonable offer, it is likely that those high offers within the range will have some sort of contingencies that would perhaps make them a little less appealing than lower offers. Nevertheless, you have a range of value. All of the 80 offers represent the market value.
Using several different multipliers also creates a range of value. The highest value would represent the list price. The lowest value would represent the base sales price and hopefully you can get an offer in between.
While a business valuation multiplier is definitely not as accurate as a business valuation by a licensed professional, it will give you a place to start. Don’t forget to share this article with your business broker so he or she can help you with your business value.