Business Valuation: Multiples
Earnings multiples come from small business transaction databases that were created and which have grown increasingly sophisticated over the last 20 years.
In 1982, the Institute of Business Appraisers (IBA) gathered business sales data from several large business brokerage firms (mostly in California) and provided analysis of this data exclusively to its IBA membership. In 1991, California business broker Jack Sanders created Bizcomps® , which he published and sold in printed form.
Over the years, IBA and Sanders have both continued gathering data. There are now over 23,000 transactions in the IBA data base and nearly 6,000 in Bizcomps® . The IBA data covers 725 SIC codes or business classifications. Bizcomps® covers 417 SIC codes. The average sale in both of these compilations is under $1million.
Shannon Pratt, one of the nation’s leading business appraisers, also got into the act in March 1997, with his own data base, called Pratt’s Stats®. His data now includes over 4,000 business sales, with much more detailed information on each sale than the other two sources. Pratt’s Stats® sales, however, average about $5 million in transaction price.
In each of these databases, sales prices and terms have been collected from accountants and business brokers. The data, when looked at closely, is pretty diverse. But, in the aggregate, it is remarkably consistent. The ‘big picture’ emerges easily.
For any one unique business, many more factors must be considered to arrive at an accurate valuation than the few data points that exist in these databases. This information now available, however, creates a reliable source for a range of multiples.
Maine Business Brokers is an IBA member and subscribes to all three databases, of course. To review the data yourself, you have to join IBA, subscribe to the data on-line, or buy one of Jack’s Bizcomps® books. IBA’s website is www.go-iba.org. You can see both Bizcomps® and Pratt’s Stats® at www.BVMarketData.com.
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The cyclical nature of the economy can add uncertainty to the timing of an acquisition, or an exit from a business. However, unlike the clarity of an improving economy or the risks inherent in a downturn, buying or selling at a market high creates a unique set of challenges.