Selling or otherwise exiting a business after investing significant time and capital, requires careful consideration. Understanding what that business is worth on the market ensures you can make informed decisions and avoid feeling you left significant money on the table.
However, reaching this valuation during succession planning or business exit planning is easier said than done. Every sector is a little different, and applying the rules of one industry to another could cause severe undervaluation or unrealistic expectations. Learning your business valuation multiples by industry will help you find a more reasonable valuation you can feel confident about.
Understanding the Value of Your Business
The valuation you present to potential buyers should reflect what the business is worth to them. Knowing this value early in the decision-making process will help you avoid undervaluing what you’ve built.
How Are Pricing Multiples Used in Business Valuations?
Business valuation multiples by industry are a common method for business valuation. They simplify complex financial data, making it easier to compare companies within the same industry.
However, business valuation multiples should be used with caution, as they do not account for the unique characteristics of each company. The following multiples should be regarded as general guidelines rather than precise metrics.
Multiples by Industry
| Industry | EBITDA Multiple(Median) |
| Manufacturing | 5.4x |
| Dental | 5.4x |
| Trucking | 4.2x |
| Healthcare | 4.3x |
| Restaurant | 2.4x |
| Food & Beverage Processing | 5.2x |
| Construction | 3.7x |
| Information Technology | 8.8x |
1. Data retrieved from DealStats, Business Valuation Resources, LLC, as of July 30, 2024. Available at: www.bvresources.com.
2. Database includes private company transaction data from 1990 to July 2024.
3. Transactions with an EBITDA multiple greater than 30x have been excluded from the dataset.
How to Use These Business Valuation Multiples by Industry
To estimate the value of your business, multiply your EBITDA (earnings before interest, taxes, depreciation, and amortization) by the appropriate multiple for your industry. Remember, this provides a general starting point, and final valuations may vary depending on specific business factors.
Manufacturing Business Valuation Example
Let’s assume you own a small manufacturing business with an annual EBITDA of $500,000. Based on the data, the EBITDA multiple for the manufacturing sector ranges between 3.2x (25th percentile), 5.4x (median), and 10.4x (75th percentile). To estimate the value of your business:
- Low-End Valuation (25th percentile): $500,000 x 3.2 = $1,600,000
- Median Valuation (50th percentile): $500,000 x 5.4 = $2,700,000
- High-End Valuation (75th percentile): $500,000 x 10.4 = $5,200,000
So, the estimated value of your manufacturing business would be between $1.6M and $5.2M. The final valuation may vary based on factors such as:
- Market conditions
- Customer base stability
- Competitive advantages
- Proprietary systems, technology, or patents
- Growth potential
Dental Business Valuation Example
Let’s say you own a dental practice with an EBITDA of $200,000. Using the range for dental practices, with a multiple between 1.9x (25th percentile), 5.4x (median), and 14.0x (75th percentile), the estimated valuation would be:
- Low-End Valuation (25th percentile): $200,000 x 1.9 = $380,000
- Median Valuation (50th percentile): $200,000 x 5.4 = $1,080,000
- High-End Valuation (75th percentile): $200,000 x 14.0 = $2,800,000
Thus, the estimated value of your dental practice would range from $380,000 to $2.8M. However, the final figure could vary based on factors unique to a dental practice, such as:
- Patient retention rates
- Location
- Condition of equipment
- Expansion potential
Using Business Valuation Multiples by Industry
Using business valuation multiples based on percentiles gives a more nuanced approach to estimating your business’s value. These percentiles offer a solid foundation but always consider industry-specific and company-specific factors. Consulting with a valuation expert ensures the estimate accurately reflects your business’s true market value.
Common Pitfalls in Using EBITDA Multiples
When using business valuation by industry, it’s vital to avoid common mistakes like these:
Over-reliance on multiples
This can happen on both the buying and selling sides. For example, a buyer may dispute your valuation because it deviates from the multiples by industry method. In these cases, it’s critical to have the documentation to back up your valuation to increase the business value in their eyes.
You may also need to consider factors like discounted cash flow (DCF) analysis, comparable company analysis, and precedent transactions to reach a realistic valuation.
Ignoring Non-Recurring Expenses and Revenues
Non-recurring expenses are one-time costs that do not affect the future earnings of a business. Similarly, you might encounter non-recurring revenues, such as a temporary boost from the “Shark Tank Effect,” which provides a sudden increase in revenue that quickly diminishes. While it’s important to consider these factors, they should be approached with caution, as they can distort your financial analysis.
EBITDA multiples can vary significantly within an industry, as shown by the data set provided. One key factor influencing these multiples is company size. Generally, larger companies tend to have higher EBITDA multiples. Several factors contribute to this trend:
- Depth of Management: Larger companies often have more experienced and capable management teams, which can drive higher valuations.
- Organizational Efficiency: Bigger firms typically benefit from greater operational efficiencies and economies of scale, which lead to improved profitability and higher multiples.
- Access to Capital: Larger companies usually have better access to capital and financing, enabling them to support growth and strategic initiatives, thereby enhancing their valuation.
- Earnings Stability: As companies grow, their earnings often become more stable and predictable, reducing investment risk and potentially leading to higher EBITDA multiples.
These elements collectively contribute to why larger companies often command higher EBITDA multiples compared to their smaller counterparts.
Not Adjusting for Growth Potential
Potential growth opportunities are a key factor in valuation. Generally, those buying a business do not view the transaction as an opportunity to generate a steady revenue stream, although that can be important in the short term, depending on the buyer. Instead, they see it as an investment. People invest in potential growth. At the end of the day, that is what you’re selling.
When Ray Kroc bought the first McDonald’s, he was not buying a hamburger joint. He was buying a system that he could—and would— turn into a fast food empire.
As you sit here considering selling your business, you may not be interested in pursuing that empire. Perhaps you’re ready to retire comfortably or want to focus on a new venture. However, your value still includes that potential, and multiples by industry help capture that potential.
Businesses with higher growth potential command higher multiples, often outside the typical range.
Transaction Structure
Transactions can be structured as either asset sales or stock sales. In an asset sale, specific assets and liabilities are acquired, while other assets, such as receivables, remain with the seller. It is crucial to understand how the transaction structure affects the overall economic benefit to the seller, as this can lead to significantly different valuation outcomes when applying multiples.
Size of Company
The size of a company is a critical factor in determining valuation multiples. Generally, larger companies tend to command higher multiples, whereas smaller companies are associated with lower multiples. This trend is influenced by several factors, including the reduced risk profile of larger companies, which often benefit from more robust management, established operating procedures, and greater access to capital.
It’s important to work with a professional who understands this potential in your sector, such as a:
- Trucking CPA
- Healthcare Accounting Services
- Real Estate CPA
- Restaurant CPA
- Food & Beverage Accounting
- Construction CPA and Consulting Services
- Accounting Services for Franchises
- Information Technology CPA & Financial Advisor
You could significantly undervalue your business if you’re not adjusting for this. It’s time to find out.
What Is Your Company Really Worth?
At DHJJ, we help small business owners achieve financial health and help them make data-informed decisions as they sell their companies. Our experienced CPAs go through a comprehensive valuation process and assist you in negotiating a fair sale price with buyers. To find out what your business is really worth, schedule a chat with our business selling experts.
