Using a “Multiple of Earnings” is the most popular way to value small businesses that are for sale.
But that raises a difficult question: By what number do you multiply your earnings?
Much of what has been written about valuation multiples states that most businesses are sold with a multiple that ranges from 1-5.
But in truth, smaller businesses that sell for 4 or 5 time their earnings are rare – at least when it comes to owner-managed businesses.
In smaller businesses with an owner’s benefit of $50,000 to about $250,000, the owner will usually also manage the business on a day to day basis. The buyer is in truth “buying a job”. Their return on investment is much lower because they are investing not just there money but there time.
In larger businesses, where there is enough cash flow to hire a full time, professional manager the owner can make a return on his investment without a full time commitment – so that business will be valued at a much higher level. That’s not to say you can’t sell your business for a multiple of 4 or 5, but in my experience the vast majority of smaller businesses sell for a figure much closer to 1 to 3.
So I suggest you start with a multiple of 2.0 and use the list of factors below to adjust the multiple up and down based on your specific situation and you company’s performance.
This is just a partial list to get you started, there are bound to be unique factors that affect your business that are not listed here.
Positive Factors That Can Increase the Multiple
*Sales and profits have risen consistently each year for at least 3 years.
*A significant amount of sales come from repeat customers. Even better is revenue that comes from automatically recurring charges. Web hosting, alarm monitoring and self storage are few examples of business that may have reliable repeat revenue each month.
*Proprietary products, patents and/or trademarks.
*Exclusive rights to a territory.
*Less warranty exposure than is typical in your industry.
*Management And /or employees will stay on after the sale. The more experienced or uniquely talented these people are, the better.
*The business is a franchise of a well established – And well known – company. For many buyers, the support and training they get from the franchisor is a major plus – one they are willing to pay for.
*Your industry is growing and the future appears bright.
*Important ratios such as profit margin And cost of sales are above average for you industry.
*You are offering above average financing terms
For these last two items you should check with any trade associations that serve your industry. They may be able to provide you with facts and statistics that can help you show the buyer that your business is part of a growing industry or trend.
Negative Factors That Can Decrease the Multiple
*Sales and profits have been trending down recently.
*Sale and …