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Hey everybody, this is Gene Marks, and welcome to another episode of the Hartford Small Biz Ahead podcast. Thank you so much for joining me this week. We are heading towards this silver tsunami of older business owners. You know, it’s like the silver hair. I don’t have much hair, so maybe I’m not part of this, but I have a lot of clients that have silver hair. That’s because they’re older. The small business administration says that the average age of the U.S. small business owner is about 55 years old. So a lot of us have succession plans on our minds, and I’m working with a lot of clients, that are trying to figure out what to do with their businesses in the future. So, hopefully I’ll be covering more of these topics on succession planning in the months ahead for this podcast. But today I wanted to talk about valuing your business with a multiplier.
So what do I mean by a multiplier? A multiplier means where you take, either your revenues or your profits, and you value your businesses by multiplying it times a factor of what other businesses in your industries have gotten for their businesses. So let me give you an example, okay? The restaurant industry has a multiplier of 0.41 of revenues, which basically means if your revenues are say, a million dollars, then multiplier, using that as to value your business would say that your business is only worth $410,000, right? Financial services companies, and that includes like accounting firms and wealth planners. They actually have a pretty high multiplier. Their multiplier is 1.12. So if you had revenues of a million dollars, then your business might be worth 1.12 of that a million one and change.
I used some other examples, when I was researching this, like for example, like if you own a carwash, you actually have like a 1.73 multiplier of your revenues almost two times. So if your carwash is doing like a million dollars in sales every year, your business could be worth as much as 2 million dollars. These are multipliers. Now I’m using it based on revenues. Some people have multipliers based on industry, based on profits. So you can do it that way as well. And every industry sort of has their multipliers. And if you talk to a good business broker or a good resource. I really like this website called BizBuySell. It’s BIZ BUY SELL. You can find out the multipliers for your industry. So if you’re looking to sell a business and you’re a manufacturer or you’re a service provider or distributor or whatever, you can look to see what those multipliers are. Now, I’m not crazy about this method of valuation. It’s, by the way…
It’s very popular. A lot of people use it. It’s a good way to check. If you come up with another valuation of a potential company you wanna buy, or you’re trying to value your own company based on your assets, which is very common. You take the fair market value of your assets, less your liabilities and try to figure out what your goodwill is. You come up with a valuation for that, and then you compare it maybe to your industry multiplier of revenues just to see if you’re in the same ballpark because again, that multiplier, it’s like a look back effect. It’s based on history. So it’s a good way to check what your valuation is, but for the most part, when you’re trying to sell your business, the multiplier way of valuing your business is really only effective for certain types of businesses.
These are businesses that have like a recurring revenue stream, you know what I mean? Like accounting firms is a good example. I run an accounting firm, say my revenues are a million dollars a year. If done the right way, if I sell my accounting firm to somebody else, they should be able to retain most of my clients. I mean, that’s the idea. And that in fact does happen, if it’s done the right way. Most people don’t change accountants unless, they’re really forced to. Even the turnover in accounting, clients with accounting firms generally nets itself out. I know a lot of firms that lose clients, but then they also gain clients. So you can use that. I like the carwash as another example.
I mean, if you’ve got a good location for a carwash, you can value your assets, the building is worth this and my land is worth that and my equipment, my car wash equipment is, has the value of this if you own it. But, the multiplier effect might be a better way because you’ve got a business that’s got recurring revenue. It’s there every week. People are coming in to get their cars washed. It’s kind of like routine for a lot of people. Car washes are dependent on the season of the year as well. So that’s why it’s good to kind of spread that out over 12 months. But you can look at the revenues or even profits and use a multiplier valuation and it kind of, it could make sense.
I mean, yeah, the best multipliers are like the large cable companies. If Comcast is gonna sell its cable business, generally those businesses get sold on a multiplier because you’ve got like monthly subscribers to those businesses. And when people are paying a certain monthly amount, it’s gonna recur. I mean, people are generally not gonna, you’re not gonna have that much drain on those employees or people or those customers. So because of that, if I’m buying a business, you can expect that to continue on. So the bottom line is, is that the multiplier method of valuing a business, it’s not a bad way to do it if it’s a business with recurring revenues and profits that you can really kind of look out. You’ve got contracts, you’ve got consistent customers, you’ve got subscribers, something like that. Those tend…
To be valued better by using a multiplier, to do that. For most other businesses, B2B businesses, manufacturers, distributors, even retail stores and restaurants, it gets a little bit more challenging to do that. It might make more sense to just sell your business based on your assets, less your liabilities, including some goodwill that’s just an estimate of your fair market value based on your location or your intellectual property or your customer list. But you should, even if you do the asset valuation method, you should still compare it to the multiplier method as well, just to make sure that you’re in the same ballpark. For those of you guys that are looking to buy a business and you’re using this multiplier effect, just remember that the multiplier effect is based on history. You’re looking at past data. So first of all, you have to make sure that data’s reliable.
And then also you have to really be confident that those trends are gonna continue. If the business had a million dollars in revenues last year, it’s gonna have another million dollars this year because that’s what you’re basing the multiplier off of. So, keep that in mind if you’re gonna be using the multiplier method to value a business. So, like I said before, I mean I’ll come back to some succession planning topics, but valuing your business is a big deal and many of us are over the age of 50 and thinking about succession planning and trying to figure out what our business is really worth. Again, I like valuing based on assets and liabilities and fair market value, but I get it that the multiplier method does have its applicability depending on the type of business.
And it’s a good, good sort of sanity check as well, regardless of how you’re valuing your business. So it should be a way that you’re using to help figure out the total value of your business, but it doesn’t have to be all end all method of figuring out how much your business is worth. That’s my thoughts on the multiplier method of valuing your business. My name is Gene Marks. You have been listening to the Hartford Small Biz Ahead podcast. If you need any advice or tips or help in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. In the meantime, I will be back next week with some other thoughts or advice to help you run your business. Yeah, I’ll probably be visiting succession planning topics in the future too. Hope this helps you as well. We will see you again soon. Take care.
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