My Florida Business Broker

Multiples Don’t Tell the Whole Story

I recently had a seller who lost out on a good deal for his business because he talked to a “guy.” There’s always a guy who’s ready to tell you that you’re not getting the full value for your business because your multiple is too low. My seller came back to the buyer with a counteroffer that was unrealistic, and the buyer moved on. Here’s the math on that: a 10X multiple of zero is zero.

But buyers still chase a high multiple, believing it’s the magic number their business is worth. They have heard stories about owners with similar companies and similar sales who received 3X, 4X, yes, even 10X multiples on their business’s valuation. Here’s why that’s often not realistic – or even provable.

The idea behind multiples analysis is that when firms are comparable, the multiples approach can be used to determine the value of one firm based on the value of another. It’s based on projections of a company’s growth in value rather than on historical data, which makes it an art as well as a science. 

The trouble with stories from owners about their multiples is that sales data is confidential; there’s no way to know the factors that went into valuing another company or understand what the buyer was willing to invest to acquire it. (Competition among buyers can drive up the price of a company beyond what it might be under other market conditions.) And owners aren’t always sure what multiples were multiples of. There are plenty of other factors in the deal that could have affected the price, such as the owner holding a note or deferring payment based on future earnings.

When I provide an opinion of value for a company, it’s based on data that can be verified and potential that can be demonstrated. I value a company based on its tax filings and clear financial records. I look at the location, size, industry, staff, management structure (and stability), technology and intellectual property, and the value of the brand in its market or market share.

I look at customer concentration and place a value on guaranteed future revenue (recurring contracts and customer agreements, for example.) And then I look at comps. Comparables are the real key to pricing a company since they tell me what buyers have actually been willing to pay for similar companies in similar markets. In the end, it’s all about what a buyer is willing to offer right now for this business.

The bottom line and the only way to compare two companies is by comparing SDE (Seller Discretionary Income.) That’s what a buyer is really looking at, and what a multiple, if any, is going to multiply. That’s why I always recommend that an owner partner with an experienced and qualified business broker to get a complete and realistic opinion of value. A broker will also help an owner understand how the deal structure can affect the sale price and how much of it the owner gets to keep. 

There’s a lot of talk out there; it matters who you’re listening to.

If you’re curious what your business is worth the first step is to contact me for a complimentary opinion of value. 

Bianca Evans

Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field and has completed over 200 transactions since 2006. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.

In her 17 years of experience, she has sold businesses in manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.