The Logic of Business Sale Multipliers

There are many ways to arrive at an appraisal value for a business, one being to use a multiplier against the net profit generated by a business - but it's not that simple.

The return on investment (ROI) methodology simplified means that if I invest, say $500k, in a business purchase and expect a return on my investment of 33% pa, that equates to a net profit of $165k pa. A multiplier reverses this equation as 3 x the Net Profit of $165kpa resulting in a business appraisal value of $500k.

What needs to considered when using multipliers, is how the multiplier number is derived and what are the influencing factors. A common mistake is to look at the business sales marketplace as a whole and use one multiplier for all industries, when in fact each industry has it's own range of multipliers which are in turn influenced by the general market.

Market influences include things like the general state of the economy, interest rates, Current ROI available from Listed Companies and consumer sentiment. These all affect potential buyers appetite for risk as well as their access to capital.

Industry influences reflect whether or not a particular industry is in high demand. For example ICT service providers are currently experiencing high demand from buyers which is putting upward pressure on that particular industries multipliers. see my article Why ICT is the hottest Industry for Acquisitions

Multiplier Influences

Multiplier influences that are a result of an individual businesses risks and opportunities are many and varied but examples include-:

• Historical sales of similar businesses
• Revenue Growth or decline
• Potential Capital Gain
• Security of tenure
• Diversity of income
• Contracted suppliers and customers
• Intellectual Property
• Value of Plant & Equipment
• Market Share

In order to find the correct multiplier you need to draw on good quality, data that is current and relevant. If done properly, your appraisal value will be an asset. It removes a significant barrier to the business sale providing justification for the asking price and allowing you concentrate on the myriad of other issues that need addressing in order to achieve a successful sale.

Troy Potter : Licensed Business Broker 0412 286 176