What drives the sale price of a business?

We are often asked how we determine the likely sale price of a business. There are a number of aspects but importantly with some planning you can increase the sale price of your business.

There are Value Drivers for every business that go beyond the financial aspects , whilst EBITA may often be used as the underlying figure for calculating the sale price of a business it’s the multiple applied to this figure that is the potential sale price.

What is a multiple?

You will often hear people saying I think the business is valued at 1,2,3, 4 or more times or a multiple of these sort of numbers.  In simple terms people are saying a buyer should pay this many times EBITA as the sale price of the business.

For example a business with a $300,000 EBITA with a sale price of 3 times would be $900,000.

How do I influence the multiple?

There are a significant number of factors that increase the sales multiple of a business , the best way to understand it is to think like a buyer. What would make you see a higher value in the business ?  Here are two examples.

Investor or Business operator-   An investor may pay a higher multiple for the business but they would then want a full management team in place and as they are “investors”. A structure that allows them to review but not run the business day to day is what they normally seek.

Someone buying a business to work in it day to day may take on the management role so handover and training may be more important to them.

Identifying the target buyer and putting an appropriate structure in place can improve the sales multiple. It takes experience to understand the likely buyer and their needs.

Staff-  Good staff that can make a new owners life easy and are very important in the sales process. If the staff can be made aware of the potential sale and engage with the buyer in an appropriate manner this can help with their comfort level with the purchase.

Many people don’t want staff to know their business is on the market , the reality is generally they will find out or have suspicions. If they feel uncomfortable they could leave, far better to engage them in the process and explain how important they are to the buyer. Good staff add value and need to understand the new owner generally needs or wants good staff.

Overall there are a large number of factors that drive the multiple, improving each just a little incrementally improves the potential business sale price.

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