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Mid-market business valuation indicators strong

Most Americans continue to read, hear and see troubling news about the U.S. economic outlook.  Business owners need some reassurance that the sky is not falling, particularly for business owners considering the future sale of their business.  Today is a seller’s market!  But, cyclical indicators point that this window will not stay open forever.

Business valuation indicators are showing strong multiples for technology and software-related companies as well as those that cater to the baby boomer and senior demographics.  For the fifth consecutive year, Inc and Business Valuation Resources (the authority on valuation data, metrics, and comps) have prepared an interactive study to analyze the valuation of middle market companies (those with annual sales from $10 million $500 million).  Take a moment to visit this resource and see how your company stacks up compared to nearly 4,000 mid-market transactions analyzed over a 3-year window.

A word of caution.  While more than 140 industries are analyzed, you may not find an ideal comp for your business.  There is a big difference between a strategic buyer and a financial buyer.  Small businesses with sales of less than $10 million need to be aware that rule of thumb multiples based on adjusted EBITDA are typically less than middle market.  Per Rob Slee’s excellent book “Midas Managers”, firms considered small business generally see 2-4X adjusted EBITDA while those with sales in from $10MM to $100MM are more likely to see 5-7X.  Using a generic multiple is very dangerous for any business owner and is not recommended.  Determining your company’s market value through the process of an independent business valuation is THE first step and owner should take prior to taking their company to market.  Let’s take a $1MM annual sales, $200K discretionary cash flow business.  Using a simple 2-4X multiple leaves a gaping margin of error of $400,000!!!  Your business is most likely your most valuable asset.  Don’t fall prey to assumptions and being a penny-wise, pound foolish when it comes to business valuation.  Each buyer is different, with different motives for acquisition (financial, strategic, etc).  A business priced too high will not sale.  A business priced too low, well you know what happens then.

Know your value.  Know your business.

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3 Comments on Mid-market business valuation indicators strong »

Bill Warner @ 10:43 am:

This is good news. Thanks.

The indicators for investment by angels and venture capital firms that launch new businesses is solid as well. 2007 was quite a good year, and 2008 looks strong as well with the technology and life science sectors leading the way, especially green tech.

The housing market fiasco, weak dollar and the down public markets are not helping in this arena as some investors are squeezed and have less with which to invest.

All in all, more new businesses will be launched this year, which should grow into companies that you can help sell later.

All the best…………….Bill Warner

FMV @ 10:50 am:

Bill –

Thanks for your additional insight. Your wealth of knowledge regarding Angel investment, VC investment, and running a successful business is always welcomed!

If any of our readers are in need of start-up, sales/marketing/biz dev consulting, feel free to visit Bill Warner’s website http://www.paladinandassociates.com.

Harry @ 1:14 am:

It is worth mentioning that seller discretionary earnings (SDE) is a far more common earnings basis used in valuing small businesses and professional practices.

One reason is that private firms are not required to comply with GAAP. Hence, what is reported as EBITDA may differ from business to business.

For Main Street businesses, the credit crunch effect will be substantially more felt than mid-market. The cash to find such deals generally comes from the small business buyers and sellers – who are affected by the current downturn.

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