The most well-known metrics for “pricing” a potential business sale involve applying a multiple times an income amount, EBITDA (earnings before interest, taxes, depreciation and amortization). Who sets the multiple? Typically, this number is selected by the buyer (group) based upon their assessment of several factors, as follows.
- Revenue. Above $15 million in revenues, multiples begin to increase. Some companies, like software, sell at multiples of revenue.
- EBITDA. For this numeric below $2 million, the multiple rarely exceeds three or 3.5. At $5 million of EBITDA the multiples could reach 5-7, or more.
- IP – Intellectual Property. For IP that creates clear competitive advantages, the multiple should reflect an upward tilt.
- Growth. The stronger and more consistent the growth path, the higher the multiple.
- Favored Industry. Certain industries or niche segments therein that are “in favor” will be credited with higher multiples.
- Margin Improvement. The sellers that continually institute changes to monitor and measure, and improve margins will be rewarded.
- Minimal Competition. Firms that rank in the top three of their marketplaces are more desirable.
- Barriers to Entry. The tougher and more realistic are the entry barriers, the better the multiple.
- Auction. Buyers involved in an auction or competitive bidding process usually pay more.