During the initial meeting with a prospective seller, we want to know the seller's "magic number." What does he really want for a selling price and how did he arrive at that amount? Have other advisors suggested a multiple for his business, and what was their basis for that number or range?
Anyone wanting to sell his business has heard of the oversimplified metric: EBITDA x Multiple = Value or Purchase Price. For most sales of private companies, sourcing the specifics or basis for these two variables can be difficult. Sometimes this data is shared via sources close to a deal such as a business broker or investment banker. About half the time, the selling company name is provided. In addition, public company transactions should be adjusted to better reflect the private sector activity.
So how is a multiple selected?
- For only a few industries, value is also estimated based on gross sales. For example, software companies with solid recurring sales may sell for a revenue multiple of 1.5 to 3.5 times gross revenue, depending upon the revenue size and type of product.
- Except for the excessively profitable firms, companies with revenues up to $15 million often sell for multiples of not exceeding 4 to 5.
- Even if the data is not specifically available, enough professionals have conceptual ideas of multiple ranges. However, these should not be accepted as reasonably accurate unless a valuation expert or investment bank has conducted an analysis.