About Business Valuation Multipliers

Here’s some basic information on industry multipliers and business valuation.

First, an explanation of using multipliers… one of the most widely used valuation benchmarks; this method multiplies the profits or sales of a business by an industry averaged “multiplier” to calculate the company's value. The multiplier, which is based on average sales figures within the industry, is multiplied by either the company's profits or company's gross sales.

The resulting price determined by these multiples typically includes intangible assets (such as brands, copyrights, trademarks, patents, licenses, franchises, customer lists, and goodwill), along with all furniture, fixtures, and equipment. It does not include cash, accounts receivable, inventory, real estate, other tangible assets, or liabilities. These items must be added or subtracted to arrive at the correct equity value for the business.

For example, if companies in your industry value at an average multiplier of 1.5 on gross revenues, and you generate $2 mil/yr in revenue - your business would be roughly valued at $3 mil.

There are a couple of problems with the whole multiplier valuation method. First, this valuation method does not take into account important factors such as the profitability of the business and cash flow indicators for the company. Secondly, since this valuation is based on industry averages, it doesn't factor in the differences between companies within an industry, which can be very different in size, brand value, customer-base, management efficiency and other “soft” factors. Multipliers also negate intangibles such as innovation, creativity, teamwork, location and other core markers for success. All these differences make it difficult to substantiate the validity of a multiplier, which can throw off the accuracy of the valuation. This is why business owners pay big buck for full appraisals that do look at all the variables in their business environment.

www.bizminer.com has great reports with current industry multipliers that won't cost you an arm and a leg. Many industry websites will also offer common multipliers.