“Zink: The misconception about multiples”
A quick review of the growing older business owner problem, how to evaluate businesses, what factors determine the multiple used for a realistic business valuation.
Older business owners looking to sell their business:
[As Americans get older so do business owners; this will create a large demand for financed and experienced buyers in the upcoming years. From the article, the May 24, 2019 Kiplinger Letter, Forecasts for Executives and Investors stated, “As America’s population gets older ... many businesses will change hands in the coming years. Just as the workforce is aging, the ranks of business owners are grayer on average. A lot of owners are mulling how and when to sell. A quarter of business owners are over 60, a figure that will grow once all of the members of the baby boom generation reach retirement age. Lots of them intend to sell relatively soon ... as many as half aim to do so in the next five years, according to one recent survey of business owners. But relatively few have an exit plan in place.”]
Metric used to evaluate small to medium sized businesses:
[A business that has scaled, added units, added employees, where the owner becomes dispensable to the business and where profits approach the one-million dollar mark will be sold based on EBITDA, Earnings Before Interest Taxes Depreciation and Amortization.]
Multiples of EBITDA for small businesses:
[These multiples generally start at two times cash flow (EBITDA) but may reach six or seven or higher depending upon factors such as: industry type, profitability, top line and bottom line growth, sound financials, market share, position in the market, number of competitors, barriers to entry, competitive advantage including monopoly, proprietary technology, recurring revenue streams, repeat and diversified customers, fast growing, reliability of annual earnings, increasing pipeline of new business, excellent service, quality and tenure of the management team, loyal employees, minimal dependency on the owner or any of the key employees or vendors or customers, intellectual property, and on and on.]