My Company is Worth an “X” Multiple of EBIDTA

When considering selling or buying a business there is too much reliance placed on the Valuation Multiple. The standard multiples for valuation may be used at best as a guide as to what the national / regional average has been.

There is an abundance of available data on common industry "multiples" that can be used to estimate a business's value. Over time, valuation experts and investment bankers have observed trends in the selling price of businesses. Multiples are merely a summary form of these trends. They are industry-specific and generally used for smaller to mid-sized businesses.

The question to ask would be “Is your business average?”

While multiples may be useful in providing an immediate ballpark of a business's value, they do not substitute for a comprehensive valuation analysis. Multiples are shortcuts to value, based on the simplification of more in-depth valuation methodologies. In the valuation industry, multiples are the equivalent of a business plan developed on the back of a napkin. This is primarily true because at that point no analysis of the data underlying the multiples has been performed, and thus neither the data integrity nor comparability with the subject business can be evaluated.

Statistically it would be an amazing coincidence if your business was valued at the same as the average – especially given the stand deviation surrounding the prices associated with valuations - let alone the tangible and intangible components of the transition itself. A comprehensive list of these components is listed below:

  •          Intellectual Property
  •          Experience of your transaction team
  •          Life Cycle of not only the industry, but of the Company
  •          Management
  •          Equity / Organization Structure
  •          Management Buy-Outs
  •          Strategic fit to the Buyer
  •          Timing of the Transactions – Article 9, estate sale, etc.
  •          No Compete Agreements
  •          Timing – How long can you afford to wait for a transaction?
  •          Goodwill
  •          Obligations
  •          Asset Base itself
  •          Customer Structure
  •          Geographical Region

Every business varies and has a unique thumbprint. Valuation multiples provide a guideline for the price of the average “healthy” business in a particular industry, but without due consideration given to the distinctive attributes of an individual business, timing of the transactions, a geographic location and ad infinitum. In addition, simply using multiples to value a business means that no benefit can be made in terms of truly understanding how to increase the value of the business should you decide to maintain it.

For any serious potential seller, it is recommended that a truly comprehensive valuation be performed. During a comprehensive valuation process, a deep understanding of the business itself, client base, employees, industry focus, practice areas and competitors is developed. One or more standard valuation methodologies are then used to estimate the value of the business. During the process, you will realize that understanding the drivers of value in your company is the significant benefit of a valuation. And the end result is that you understand the more credible economic value of your business rather than of an “average” business in your industry.

Buying or selling a business is a significant economic decision – one should not be taking short-cuts with this acute judgment.