5 Factors in Creating a Multiple
While there are many ways to get a value for your business, we always point towards a professional valuation as not only the most accurate, but the one that qualifies for SBA and bank financing. In this article we’re going to talk about five factors that professional valuation experts consider when evaluating the proper multiple for your business.
More Than Numbers
While we are never going to argue that an accountant doesn’t know numbers, we will point out that, without years of experience with business transactions, an accountant or CPA can only offer an academic valuation. It may be accurate, but the advantage of having the knowledge and experience which comes from doing valuations regularly leads to a professional valuation that is tethered to the marketplace, and for those who are actually looking to sell a business, a number that has a relationship to the marketplace really matters.
So, let’s look at what the professionals consider for a valuation multiple that CPAs and accountants who aren’t regularly involved in business deals don’t:
1. Industry Assessment
As we saw during the pandemic, some businesses thrived. Others really struggled.
Is your industry on an up or down trend? Is there regulation or legislation that is pending that can really change the model of the industry?
Is the industry susceptible to supply-chain disruptions? Weather? Geopolitics? Prior to 2020 these factors may have been never-never thoughts that we thought didn’t relate to Main Street businesses. We know better now.
2. Company’s Competitive Position
As with the industry assessment, an assessor will look at whether the company is on an up, down, or stable trajectory within the local, regional, and possibly national markets.
How is the company competing (price, quality, knowledge, customer service, etc.)? Are any of those competitive vectors under threat from new entrants? How?
3. Internal Trends
Just as we saw after 2008, many potential buyers are “giving a pass” to business numbers from 2020. But that anomaly aside, what was the profitability year-on-year before 2020, and what is it now, when we are many months since shutdowns and business closings?
4. Ownership Change Risk
With a solid team, a business should stay stable even with an ownership change. In fact, when done right, many customers don’t even know the business has changed hands for months or sometimes years.
An assessor will look at how involved the owner is with sales and relationship management. He/she will also look at how much recurring revenue is coming into the business, a factor that de-risks the specter of an ownership change.
5. Desirability in the Marketplace
How desirable is your business in the current climate? For example, when the Affordable Care Act was going through the legislative process, a lot of health care related businesses didn’t go to market and buyers were adopting “wait and see” attitudes until the ink on the new laws dried. What are market conditions around your type of business and your industry at this time?
There can be other factors to consider in valuations, depending on the industry and specific business situation, but these five factors are always considered when determining the right multiple for a business value. Remember that before even looking at these factors the business needs to have clean books and operating manuals.
Do you have an academic value of your business and want a professional one instead? We can help with that! Give us a call.
