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What’s a Multiple?

And what does it have to do with the cash amount you ultimately receive for your company?

When people say they sold their business at 9x -

They’re saying this:
I received nine times my net annual profit at the close of my transaction.

For Example -

Let’s consider you have a roofing business doing $5M in revenue, and after expenses, you’re doing $1M in profit. 

In this industry, a business like that might have a multiple of 9x. This makes the valuation of this roofing  company $9M.

A multiple is what your net profit is multiplied by. In this case the pest control business owner’s profit was $1M. His multiple was 9x.

$9M = x 9 1M Valuation Net Profit (EBITDA*) Multiple

* EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization)

Business owners always wonder: “What is my company worth?” 

This is a broad question. Many people interpret this question to mean, “What’s the cash at close I receive?” Or, “What’s my valuation?”  People typically talk about the overall worth of your business in terms of valuation, such as the the pest control business above. 

Here, his valuation is $9M. His multiple is 9x. 

However, what’s way more important than your valuation or your multiple are the overall terms of the deal.

What informs the multiple you receive for your business

Watch Out for Fish Tales at the Country Club

Friends or competitors will talk about their wide range of multiples — 2x, 5x, 8x, 13x. With these stories, business owners can start to develop a skewed perception of the value of their business. Right or wrong, this can lead to a lot of assumptions.

For Example -

In the example above of the business owner, he might receive a 9x multiple at close but then receive even more cash over time, as a result of growing the company with his future partner.

What’s more important than a multiple are the overall terms of the deal.

In summary, valuation – or the worth of your business – is usually communicated as a multiple of revenue (profit), or “EBITDA.”

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Watch this 90 second video to hear about how the big picture is more important than upfront valuation.

Considerations when shaping deal terms -

Here’s what Private Equity Groups (PEGs) consider when shaping the terms:

There is an inverse relationship between risk and return.

  • So the riskier the business, the less it’s worth and the lower the multiple of profit will be.
  • Whereas the less risky the business, the higher the multiple will be.

The risk and return ratio can not only determine the multiple but also the terms of the deal.

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Book Your Sellability Stress Test

Want support determining what your business is worth today and what a normal range multiple is for your business?

If you want the facts based on your unique situation, and you want to know the best step for you, then book your sellability stress test by filling out the form below.

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