Business Valuation Multiples:
What Factors Affect The Multiple

Whether you price your company based on sales or profits, there is a long list of variables that affect the business valuation multiples.

Below is just a partial list of factors that may apply to your business.

But this is just a partial list, 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 businesses 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.

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 profits have been inconsistent or unpredictable in the recent past.

• Sales from your most important product has been down or stagnant.

• One customer accounts for a large portion of your sales - more than 20%.

• There are many businesses similar to yours that are also for sale. Or your products are widely available at many places - a "Me To" product a line.

• The business relies heavily on location for its success but the lease is not transferable or is about to expire. If this applies to your business, try to get an extension on your lease before you start to sell.

• Pending legal or government issues such as law suits or environmental concerns.

• Important ratios such as profit margin and cost of sales are below average for you industry.

• A large amount of obsolete inventory.

• The business is part of a weak franchise or one with a bad reputation.

• Too many old and uncollectible accounts receivable.
  
  

Neutral Factors That May Not Affect The Multiple

These are features of your business that may be positive but are not special. In other words, these are things you would expect to find in the average business similar to yours. It’s likely that other businesses that are for sale will have many of these same features, so they may not allow you to gain a premium multiple. But they can definitely help you present your business in a positive light and should not be ignored.

• The business is not overly dependent on you for its success and none of your customers buy simply because of their personal relationship with you.

• The business is not overly dependent on one customer - no one customer should account for more than 10% - 15% of your sales.

• The business is not overly dependent on one single product.

• The facilities - warehouse, factory or retail location - are in good shape and will allow the company to grow without a major investment.

• No pending legal issues.

• It is not a seasonal business and sales are fairly consistent throughout the year.

How Do These Factors Affect The Price

Sellers tend to focus mainly on the positive factors when talking to buyers.

Buyers, however, tend to zero in on the negatives - or what they perceive to be negative. They are averse to risk and so they will always be on the lookout for problems.

If any of the negative factors listed above exist in your business you are not alone. Almost every business has some problems and they should not stop you from successfully selling.

That these problems exist isn’t the issue, how you deal with them is.

You have several choices when it comes to the weak points of your business.

You can lower your price accordingly and show the buyer how and why you have discounted your price, you can ignore the issues and wait for the buyer to point them out, and you can fix the things that are fixable. Or you can do a combination of all the above.

If you have old or obsolete inventory, get rid of it and take the lose. The same holds true for uncollectible receivables. The buyer will not pay you anything money for these things and they will only help to create a negative overall impression of the health of your business.

Other factors - such as a decline in sales in recent years or one customer accounting for much of your revenue - can’t be fixed so easily in the short term. If you don’t have the option of holding on to the business for another year or two so you can improve these things than you will have to adjust the price accordingly.

Finally, there are those items that you don’t control such as the fact that there are many similar businesses on the market or you are part of a franchise that is struggling.

I would suggest that you not lower your original asking price because of these items. But be aware that the buyer will probably bring them up at some point so be prepared to deal with them.

Before lowering your price, try first to offset any of these negatives with some of the positives features of your business. Maybe there are many businesses similar to yours on the market, but if your profits have steadily increased over the last few years or if you have a favorable lease in place that is transferable, you can show the buyer how your business is worth the price you are asking.

Step 2 - Valuing A Business - Table Of Contents:

The Multiple Of Earnings Method

Asset-Based Valuation Method

Business Valuation Terminology