4 factors that impact your business’s market value

By Scott Danger, CPA, CVA

Preparing to sell your business can feel like you’re stepping into uncertainty. One question that tends to swirl in many business owners’ minds: How much can I expect a buyer to pay?

 

The answer: It depends.

 

There are two key metrics that go into determining a sale price for your business. One is your earnings before interest, taxes, depreciation, and amortization, otherwise known as EBITDA. Another and perhaps more impactful metric to consider is your multiple.

 

Why is your multiple so important?

 

You can think of EBITDA as your company’s cash flow: the money you have on hand to pay taxes, buy new equipment, pay your debt, and give a return on investment to the owners. Your multiple is a measurement of risk—the higher the multiple, the lower the perceived risk, and vice versa.

 

These two metrics provide an estimate of your business’s value using this formula:

 

EBITDA x Multiple = Estimated Value

 

For instance, say your EBITDA is $1 million and your multiple is a 3. That would put your business’s estimated value at $3 million.

 

Your business’s multiple is first determined by its industry—i.e., the amounts for which other similar businesses have sold. This sale history gives you a range of what your business’s multiple might be.

 

It’s not uncommon for multiple ranges to vary from industry to industry. For example, your industry might see multiples that range from 3 to 5 while another industry’s may range from 4 to 6.

 

What is your business’s market value?

 

Your business’s specific multiple—and ultimately its market value—is based on several factors. Here are four factors to consider.

 

1. Supply chain management.

Having a solid supply chain is one way to reduce risk for buyers—and positively impact your multiple. This means sourcing materials from multiple vendors and making sure your business is protected from pricing impacts such as tariffs.

 

A couple questions to consider: If you need a certain widget for your product and you can buy it only from company A, what happens if company A goes out of business? Where are your vendors located, and are they impacted by tariffs?

 

2. Owner reliance.

 

If you’re involved in all your company’s sale negotiations or tasked with maintaining key customer relationships, your departure could disrupt these activities. A company that is less reliant on its owner means less risk for the buyer and a higher multiple.

 

Ideally, you should have a team in place that will stay in place when you sell. This allows a buyer to relax knowing there will be continuity. How could you build up your team and make sure its members stick around?

 

3. Customer concentration.

 

Having 20 customers that each make up 5% of your sales is less risky than having two customers who represent 80%. If your business’s customer concentration looks more like the former, this is likely to benefit your multiple.

 

Questions to ask yourself now:

• How can you lock in purchase orders or contracts to secure these customers?
• If your business needs to diversify its customer concentration, can you focus on growing other customers?
• If you do have long-term customers, can you secure them with a long-term contract to give a buyer assurance they’re not going anywhere?

 

4. Financial integrity.

 

Your business’s financial integrity is based on its accounting systems and the reliability of its numbers. If a buyer can look at your financials and trust what they’re seeing, this can help to boost your multiple.

 

One way to do this is to work with your accountants to get accurate financial statements at the end of each month or quarter—not only at the end of the year. It’s also important to follow Generally Accepted Accounting Principles (GAAP) and to have solid accounting processes in place.

 

What should you do now?

 

The good news about the factors I’ve laid out here: all can be improved upon or changed within your business given enough time.

 

Of course, the further out you are from the sale of your business, the more time you have to act. But even if the sale of your business is imminent, taking action to reduce risk in these four areas could help to move the needle on your multiple.

 

In other words, lowering uncertainty for a buyer could also help to lower uncertainty for you.

 

A clear path to a brighter future

 

It’s never too early to start improving upon your business.

 

Even if you’re not planning to sell, taking steps to improve your supply chain management, owner reliance, customer concentration, and financial stability can help to drive your profitability—and allow you to sleep more soundly at night.

 

Starting with a business valuation can be an important first step. This will give you a multiple and value. But it’s what you do with this information that truly matters.

 

Once you have a value, you can take action to reduce risk for buyers—and maximize your sale price.

 

If you’d like to take action to improve your business, Abdo can help. Our forward-thinking advisors and certified valuation analysts can give you both a place to start and the guidance you need to reach your goals.

 

To learn more about how we can empower you, contact us today.