Comps and multiples
December 25, 2023
by a searcher from University of Pennsylvania - The Wharton School in San Francisco, CA, USA
Apologies if this has been asked but how do you find the reasonable multiple ranges for small businesses?
I have worked around larger businesses - relatively easier to triangulate multiples using public 1) trading 2) transaction precedents. How does one know what would the multiple be for example for a cabinet business? Assume a hefty discount b/c of non-public adjustment. What other factors should one consider?
from Western Washington University in Spokane, WA, USA
Larger regional banks or national banks that do lending for M&A have a good deal of information. Assuming that bank financing is part of the equation, engage your banker to help on this. Bankers generally have access to resources like Vertical IQ (or other similar databases) that can produce SIC code specific industry reports. They are (or should be) a partner in your venture.
Connect with other investors - Investment Bankers (IB), PE groups that target the same size but not the same niche, and accounting firms. Some will be responsive and others not. With a good approach, this will likely be fruitful.
Left out of this discussion are the businesses below $10M EBITDA and the mainstreet businesses. Happy to discuss those too, but assuming that they are not your target.
I focus on preparing businesses for sale and advising buyers on post acquisition strategy. Let me know if I can help. DM me if I can be of any assistance.
from Bowling Green State University in Surrey, BC, Canada
- in Canada, generally, multiples for your typical small business run 3x-6x with the exception being something like an insurance business (annuity, low capex, high margin) that runs 8x+
- and generally the multiples react to these same key factors:
-- high capex generally lowers multiples
-- high margins (gross, net, EBITDA) generally increases margins
-- service business generally lowers margins
-- project-based business, in a lot of cases, reduces to the value of tangible assets (i.e. construction)
For something like an accounting firm, I've seen roughly ~1x revenue but if it's me I would not go over, say, ~0.75x revenue with a retention adjustment after year 2
Of course, a business will always be worth what someone is willing to pay for it, so..... FOMO can be a confounding contributor to multiples.