Businesses are usually valued and sold based on a multiple of their earnings. Whether SDE or EBITDA, the multiple of earnings depends upon several factors. But does the size of the company matter?
When valuing a business, or when buyers are considering an offer on a business, the focus is upon the multiple of the earnings. Many factors contribute to what multiple would be appropriate for a particular business—certainly, the type of industry matters. For example, a manufacturing business with substantial assets typically commands a higher multiple than a service business with few assets. The number of employees and management in place can also impact the multiple. And yes, the size of the business (revenues) is proven to impact the multiples paid when selling or purchasing a business. While this might seem like common sense, the more the revenues, the larger the multiple paid.
To illustrate this, we looked at over 15,000 completed transactions across the United States. These transactions were across all industries, from accounting services to restaurants and manufacturing companies. We then sorted them by revenues. Here is what we found:
For businesses with revenues under $250,000, the median multiple of SDE paid was 2.35.
For businesses with revenues between $500,000 and $1,000,000, the multiple of SDE was 2.69.
For businesses with revenues between $1MM and $5MM, the multiple of SDE was 2.93.
For businesses with revenues above $5MM, the multiple of SDE was 3.23.
So yes, it does appear in the aggregate that the larger the revenues, the greater the multiple paid. However, it’s important to remember that these multiples paid are across all industries and are the median multiples, not the average, and not the highest or the lowest. In fact, on sold transactions with more than $5MM in revenues, the median was 3.23, the highest multiple paid was 6.63, and the lowest was under 1. So, it’s not as easy as looking at your revenues and multiplying them by the applicable multiple.
If you are considering selling a business, rest assured that a professional business broker can establish the correct multiple of earnings for your business with their expertise and training. Those business brokers who are Certified Business Brokers (By the California Association of Business Brokers) and Certified Business Intermediaries (By the International Business Brokers Association) have the documented experience that enables them to determine the correct multiple for you.
