Our corporate finance Partner, Jim, takes a look at valuation differences across the market, and what these mean for owner-managed businesses.
I am often asked my opinion on what a business might be worth, so it always pays to be up to date with the latest deal data for me to justify the multiple I am using in a valuation. The latest private company price index tells me that the mean EV/EBITDA (Enterprise Value to Earnings before Tax, Interest, Depreciation and Amortisation) multiple paid by trade buyers during the first quarter of 2018 was 10.3 times, a multiple which hasn’t varied much for the last two years.
However, this is an average figure and we have no idea what the spread of the range is, whether there are any material distorting transactions included or what sectors the businesses sold were in. And in addition to this, the mean Enterprise Value of all the transactions analysed was £89 million, implying that the businesses included in these statistics were considerably larger than the majority of those I deal with in the owner-managed sector. Maybe 10.3 is not such a reliable comparator after all.
Luckily, there are other published data sources more focused on lower priced deals. This year, the SME valuation index (published annually each November) gave a median EV/EBITDA multiple of 4.2, which should take out the effect of a very high or low transaction. However, the spread is 3.9 to 8.5 and there is no sector split. So, is the right answer for your business 4.2, 5 or 6? There’s a big difference.
Of course, the only real answer is what a buyer is willing to pay, and they will often have quite a different view about what your business is worth. Having said that, if you are thinking about selling then the best thing to do is to consider your business’ current value and how you can increase it. It may not be an overnight fix, so make sure you start thinking now and speak to someone who knows what buyers want.
A final word of advice: a smooth sales patter might tell you that your business is highly desirable and worth a lot more than you thought. If something sounds too good to be true it often is, so get a second opinion before deciding what to do next.
We can provide you with an initial, accurate valuation, pinpoint where you want to be, and deliver a strategy that helps you get there. Get in touch today for a no cost, no obligation discussion on 01254 679131 or firstname.lastname@example.org.