Valuation Multiplier: Factors That Affect Business Values

Alex Vantarakis our Strategic Alliance Partner from The Vant Group led us on a great exploration of the factors that affect business valuations. He shared stories from both the buyer and seller’s perspective. We’ve attached his slides below and included some of our takeaways from the presentation.

The answer to “What’s the multiplier I can expect on my business?” is always it depends. Most businesses sell for 3x-8x.

Some of the factors that affect the buyer’s mindset and your business values include:

  • Age of the business
  • Age of the business owner
  • Revenue does not matter, look at the EBITDA
  • 3+ years of strong EBITDA
  • More clients vs one large client (affects risk)
  • Whether or not you have a sales team
  • Organization of the business especially during due diligence
  • The buyer always wants to find a way to pay less.

Unlike what you may have heard in the past, a multi-buyer scenario can be tricky and negatively affect. This is especially true if the buyers feel like they are being pitted against each other and may be more true if the buyer really wants your company because then they can get angry and that changes their mindset.

Interestingly, buyers prefer older sellers. The psychology of that is they don’t have as much of a question around “Why are you selling your business?”

Factors that affect a seller’s decision include:

  • Operating cash on hand can cause a seller to simply cash out and close the business if the valuation is not high enough and selling the business does not NET more value.
  • Personality. Some business owners want to ensure their business is not one of the 50% that fail after acquisition. They care about their team and their business and want to find the right owner. This can slow down the selling process.
  • The sellers always want more. Sometimes, sellers want more than a business is worth.

This tip may be obvious, but it warrants repeating. Regardless of which side of the deal you are on, don’t be a jerk, it can and likely will affect the process.

An interesting question to ask if you’re buying a business is: “When was the last time you went on vacation?” Follow up with, “How was it?” You may want to know if the business can operate without an owner present 24/7.

Other interesting stats related to business acquisition:

  • 80% of new businesses fail in the first 5 years. So buying a business is more attractive than starting a new business.
  • 50% of businesses that are acquired fail in the next 5 years. This was a surprising statistic to those of us in the room. There are many factors that can affect this. Here are a few:
    • The new owner may not have the right skillset.
    • There may be a risk factor that was unknown such as a key employee leaving that causes turmoil in the team or the processes.
    • The economy can shift; economic downturns or crisis is sometimes unavoidable.
  • Product acquisition is a great way to rapidly grow a business and to successfully thrive without a sales team. However, this can negatively impact your future valuation because you lack a sales team.

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