What Are Multiples and Should I Use them To Decide What My Business is Worth?
This past week I have been told about what a business should be valued at because there was a multiple for that type of business, another broker told me they had a “proprietary” system, and yet another told me comparables are for homes. Anytime you hear proprietary pricing system, multiples or similar verbiage, just run. There is not that simple of a way to evaluate a business.
What are multiples?
Before a business goes up for sale, a value needs to be placed on the business, and this estimate of value becomes the asking price. Prices for businesses can be determined by a number of methods, one of those methods is the use of multiples. These multiples are basically a summary of the market trends of businesses in a specific sector made into a number. Those who value businesses in a particular industry will look at what businesses actually sold for, and create a multiple that is an average of the sold price of many businesses in that sector weighed against what the businesses earned.
For example, manufacturing is worth the multiple 3 times earnings.
Seems fairly simple, right? That’s the problem. Using multiples is a shortcut that can be very detrimental to your potential business sale.
Businesses are complex. Evaluating what the business is worth should be is just as complex. The value needs to be based on factors like number of clients, profit and loss statements, values of equipment, number of employees, contracts, comparable businesses that have recently sold, and so on.
So, should you use multiples to determine what your business is worth?
The short answer is no. While a multiple might give you a ball-park figure that you can use as a starting point, it should in no way drive your final asking price. Multiples ignore important details that affect the value of a business. They can mislead a business seller into believing that their business is worth far more of far less than it actually is. You probably couldn’t make your entire business model fit on the back of a cocktail napkin; similarly the oversimplification that comes in the form of multiples will only be a disservice to your business.
Have you used a multiple to determine a value for your business? Are you wondering if it is accurate? Leave us a comment or question here, and we can assist you in determining what your business is actually worth.