By Diana L. Miles, ABI
Multiple of Revenue (Part 1 of 3)
You want a clear goal to shoot for in your exit strategy, so let’s look at some common factors and how they play out in your plans.
Multiple of Revenue
It’s the easiest multiply to use, yet results are very misleading. For starters, there’s a misnomer in the term “multiple” since nearly all businesses will typically sell for a “fraction” rather than a “multiple” of revenue. With the math gurus happy with that clarification, let’s now look at why it’s so easy to apply.
- Determine the Multiple of Revenue in your business/industry to apply.
- Multiply Multiple times your applicable top line business revenue (weighted revenue that your business intermediary should be able to determine).
- Done, that’s your recommended business price based upon a multiple of revenue. No real thought or time was required, right?
Why Not Rely on this Method?
- Banks won’t lend money to buyers on this basis.
- Buyers are more concerned with the bottom line cash flows of the business.
- Most important, you could be selling yourself short in a big way.
Say your annual business revenue is $4 million, and the revenue of the business owner in your same industry a few miles away has the same revenue. You’ve placed great processes in place and have focused on a more profit-generating sales mix than he/she has. So your business is bringing in much higher net income than his/her business. A buyer will be able to step in to your business utilize your processes already in place to make great margins. Shouldn’t that buyer be willing to pay more for your business than your competitor’s business? Absolutely!
In part 2 of 3, we will discuss more relevant multiples.