Business sale price multiples are functions of “factors” such as earnings, EBITDA, EBIT, revenue or some other multiplier, neither of which are “set in stone” and are not precise. Factors and multiples vary with every business sale depending on many issues and the structure of each unique business deal.
In pricing a business using EBITDA as a multiplier factor, it is considered very differently depending on the type of business being sold. For example in capital intensive businesses the “D” in EBITDA (depreciation) is significant and is important for pricing and modeling. Similarly, the “I” (interest) is very important in capital intensive businesses such as manufacturing as well as in wholesale trading businesses with high working capital needs. Conversely in non capital intensive services type businesses, depreciation and interest is generally insignificant with little influence on business pricing
Prices of businesses with little if any earnings may be based on asset valuations. For fast growth businesses, typically “tech” type companies, valuations may based on multiples of revenue, however, consulting businesses may be valued on multiples of headcount.
Business Sale Price Multiples – Table
Despite their limitations, discussions related to business sale price multiples will continue, typically based on EBITDA. As such, a simple table is useful for benchmarking transactions. The table is based on research of US company transactions. Earnings (EBITDA) bands range from $500,000 to $10m with corresponding business sale price multiples ranging from 2.5x to 8x.
|Earnings (EBITDA)||Multiple||Enterprise Value|
|$500K to $1m||2.5-3.5x||$1.25 to $3.5m|
|$1m to $2m||2.75-3.75x||$2.75 to $7.5m|
|$2m to $5m||3.5-6.5x||$7m to $32.5m|
|$5m to $10m||4.5-8x||$22.5m to $80m|
Source: The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers; Brent Beshore 2018 Boring Books. Beshore discloses the table is based on research resources from Peperdine Private Capital Markets Project, Pitchbook, Pratt’s Stats, The Business Reference Guide and studies by Harvard University and Stanford University.
In assisting with comparisons, cash free debt free enterprise values are typically used. “Normalising” of EBITDA is generally undertaken to exclude costs related to the owner and non-recurring or unusual expenses. Where the owner is a manager (and set to leave), normalising typically allows for replacement management costs.
The table data correlates reasonably well to experience of Australian mid-size private business sale and headline price multiples achieved. However, as with all aggregated data, use it cautiously!
Business and Buyer Types determine Business Sale Price Multiples
Types of business, “performance” of the business, industry, products, customers, staff, size, maturity, risk, growth, business cycles, economic conditions and competitor behaviour all influence the attractiveness of a business and pricing. Earnings can be averaged over previous years and include a forecast period or allowances made for a very good or very poor year.
Pricing is also largely influenced by buyer types and how they calculate the value and strategic benefits they anticipate acquiring. Buyers take into consideration their intended term of ownership and own internal investment hurdles. Sellers well know that buyers are looking to reduce investment risk and maximise the return on their investment. This ultimately guides the offer prices.
Without detailed knowledge of the business and the transaction structure, comparing business sale price multiples can be challenging!
Business Sale Price Headlines
Beware of rumours, headline numbers or multiplying factors that often are not comparable and could be misleading (EBIT Multiples Mislead). The multiplier factors don’t describe deal details particularly items such as debt, earnings forecasts, future investment requirements or working capital left in the business. Similarly the multiplier does not talk about warranties, cash held over, earnouts or cash paid immediately to the seller. These all need to be taken into consideration.
As can be seen from the table, business sale price multiples are not precise and fall into wide ranges and are impacted by many variables. As such, it is very important to discuss with your advisor what multiplier and factor is appropriate for your unique business and whether your pricing expectations justifiably can fall outside (read “above”) the “normal” range.