First we need to figure out what multiples we are talking about and what we are using them for.
There are multiples of gross sales, seller's discretionary earnings (SDE), earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA). Multiples are also used as general rules of thumb. For this article I will concentrate on the methods used for the purpose of the sale or purchase of a business.
Multiples of gross sales are the least accurate as they do not account for the quality and profitability of a business as they tend to be averages for classes of businesses. Some business owners know how to run a business and make excellent profits while others barely survive. These multiples are generally used for business categories that have large numbers of the same type of businesses, such as franchises.
Multiples determine the relative value of the business's cash flow, but they do not measure the business asset value. I use a multiple to determine only the cash flow portion of the business. An asset bases analysis is a separate part of the appraisal.
For a sale of a business we need to know the SDE and the EBITDA In other words, the net income plus the seller's discretionary earnings, interest, taxes, depreciation and amortization are necessary. This number should represent the amount of money a new buyer would expect to have available after purchasing the business. Interest and taxes will depend on how the business is financed and run. Depreciation and amortization are tax credits and the money remains in the business.
Differences in businesses will require use of different multiple values. Manufacturing businesses will have a middle of the road value while construction companies will have a multiple of about half and some high demand businesses may be double. Size matters, as larger businesses will have larger multiples.
Changes in economic conditions don't change the basic multiples I use for appraisals. As economic conditions grow or deteriorate the gross sales and adjusted net profit of a business will go up or down thus increasing or decreasing the businesses value.
I also use certain economic changes to adjust the net profit based on such things as growth or decline in sales over prior years, businesses having customers that represent a large percentage of their business and other cash flow influences.
I very rarely find reason to adjust the multiples I use for an appraisal and I have been doing this for over 20 plus years.
About The Author: Bob Klein is President and Owner of Business Appraisals, providing California business owners and business buyers business appraisal services on all types of businesses. Bob Klein can be reached direct at 949-254-4062 regarding business valuations and appraisals.
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Business brokerage services in the SF Bay Area. I bring skill, integrity and energy to all of my clients and our projects. I'm accustomed to working with a wide variety of clients and their businesses; large or small, simple or highly complex. Get a free consultation by phoning 650-279-3097.
|Abdul Jobah, Business Broker, Central Valley, Kern County
As A Real Estate Agent, I offer my clients assistance with the sale or purchase of commercial properties and/or businesses. Please contact me if you are looking to sell or buy a Central Valley business. If at any time you have any questions please do not hesitate to call me at 661-703-3916.
|Harry Sidhu, CBB, Broker - SF Bay Area, Central Valley, SAC Region
Assisting both sellers and buyers of businesses - dealing mainly with Liquor Stores, Grocery Markets, Gas Stations, Smoke Shops, Restaurant Related, Retail Related, Service Related. Serving SF Bay Area, North Bay, Sacramento area. Call Harry Sidhu, CBB for assistance at 510-366-6130.
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UBI Business Brokers has been successfully selling businesses in Southern California since 1965. Our Agents have over 100 years of experience in selling small to medium size businesses throughout Southern California. We service Orange County, Inland Empire, San Diego. Phone Lee at 714-363-0440.
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