Many optimistic business sellers research the internet for the holy grail of pricing their business. They’re looking for the perfect article, youtube video, or business expert to reference a “Magic Multiple” they can use to calculate a lottery-ticket sized sale price for their business.
As good as the inflated price sounds, there is no magic trick that will enable anyone to sell a business for more than what the market will dictate. And although using the word “multiple” may sound like a concrete mathematical formula, these calculations are just one of many tools used when pricing a business.
What is a “multiple” in relation to pricing your business? A multiple is an industry-specific number multiplied by a business’s EBITDA, Cash Flow, or SDE to help find a likely selling price for a business. It’s sometimes incorrectly presented as an all-inclusive, static guide for pricing a business, giving the false illusion that a blanket formula will cover every business in that particular industry. But the idea that any single calculation can wholely determine a business’s price is misleading to sellers. Every business is unique, and each must be evaluated on a case-by-case basis and consider many characteristics.
If every business is unique, why are multiples even discussed? Multiples come from yearly reports which record and analyze business sales and acquisitions from the previous year. The information is sorted into industry categories, which can then be used as benchmarks for sales price expectations. As mentioned before, since no two businesses are exactly the same, these reports with their data and multiples are only part of the research used for pricing. Just like any other product or service for sale, pricing is will be most firmly rooted in market supply and demand.
SUPPLY: If a profitable business/product/service is unique and cannot be easily copied or repeated, it will price higher; if a profitable business/product/service is easy to replicate and there are many others like it, it will price lower.
DEMAND: If a profitable business/product/service has more buyers inclined and able to buy, it will price higher; if a profitable business/product/service has fewer buyers inclined and able to buy, it will price lower.
(It’s important to note that these observations both reference a profitable business. Profitability is the number one most important factor in pricing an existing business, regardless of other factors.)
If you are wondering how a business will be priced, you can be sure the multiple and price will be greater if the business is more unique and in higher demand, while a multiple and price will be lower if the business is commonplace and will have a hard time finding buyers.
Industry multiples are helpful starting points when pricing a business, but there’s nothing magic a multiple can do to price a business where it doesn’t belong. Following the industry calculations, each business characteristic will be evaluated with the questions, “Will this make more or fewer people want to buy this business?” and “How likely is it that there are other businesses for sale similar to this one?”
A single positive business characteristic, such as an intellectual patent, can create such a unique business that the price is four or five times higher than others in the same industry, while one negative characteristic, such as a very remote location, can drive away buyers, and cause the business price to be reduced by half.
Although industry multiples provide a great overview of a business’s potential sales price, ultimately there’s no “Magic Multiple” with enough power to negate the supply and demand forces in the business-for-sale marketplace.
If you’re interested in a free confidential pricing review for your business, contact Angela Graham at firstname.lastname@example.org, or call 256-503-2806.
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