Small Business Valuation Multiples by Industry - Key Insights

While most business valuation methods, such as discounted cash flow, can be overwhelming, valuation multiples can be an easier option.

But how do you decide the right multiple to use for your business? How do different valuation multiples work, and how can you use them to maximize the value of your business?

In today's guide, we explore the key small business valuation multiples by industry to help you accurately estimate your business's worth, gain insights into profitability, and maximize your exit.

When it comes to business exits, Exitwise can help you find the right professionals to secure a successful exit at the best sale price possible.

We'll connect you with industry-specific M&A experts who can help you evaluate your business accurately, improve its value, and sell it faster at the highest possible price.

Consult with us to optimize your business exit.

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What Are Valuation Multiples?

Valuation multiples are quantitative multipliers or ratios applied to a specific financial metric to determine the financial health or monetary worth of a business.

These multiples usually come from dividing one financial metric with another, such as the value of a business with its annual revenue, to get the revenue multiple.

Used in the market-based approach, valuation multiples are based on the concept that similar entities in the same market can have closely similar values or sale prices.

Significance of Valuation Multiples for Small Businesses

Small business valuation multiples are important for several reasons:

• Benchmarking: When you compare your business to others in your industry, you can see where yours stands in terms of strengths and weaknesses. You can identify gaps or areas for improvement to maximize your business's value.
• Understanding Growth Potential: Using multiples makes financial projections easy and more accurate. They help you see your business's growth potential and attractiveness to potential buyers or investors.
• Making Informed Decisions: Valuations based on multiples help you estimate how much to sell your business for, enabling you to zero in on an ideal sale price during negotiations.

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Key Factors Influencing Industry Multiples

Typically, different industries have varying business valuation multiples based on internal and external factors such as:

• Competitive Landscape: An industry with tough barriers to entry or fewer competitors has higher valuation multiples due to more market power. Such industries include pharmaceutical drugs due to patents, gold due to geographical barriers, and soft drinks due to brand loyalty.
• Market Trends and Demands: High demand for purchasing small businesses can lead to higher valuation multiples as potential buyers compete. Emerging trends can also raise multiples for companies that can leverage them to increase their value.
• Revenue Stability: Industries with predictable and consistent revenue streams usually have higher multiples as their income risks are lower. Subscription-based industries, such as SaaS, typically fall into this category.
• Internal Company Factors: Some key internal aspects that influence valuation multiples across different sectors include the quality of management, growth rate, recurring customer base, and operational efficiency. For example, businesses with more repeat customers usually have higher valuations.

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Small Business Valuation Multiples by Industry

Here's a quick overview of company valuation multiples by industry based on different financial metrics:

EBITDA Multiples for Small Businesses

This multiple shows how many times your business is worth its EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

The table below shows the average EBITDA multiples for different industries in the US, according to data from the New York University School of Business:

Average EBITDA Valuation Multiples by Industry

Industry

Average EBITDA Multiple

Software (Internet)

19.33x

Construction/Engineering

12.76x

Healthcare Information and Technology

21.44x

Trucking

10.57x

Insurance (General)

11.48x

Investments & Asset Management

34.85x

Tip: You can use our free Exitwise valuation calculator to estimate how much you can sell your business for based on its EBITDA.

Revenue Multiples by Industry

Let’s check out revenue multiples for the same industries based on Stern School of Business data:

Average Revenue Multiples by Industry

Industry

Average Revenue Multiple

Software (Internet)

8.38x

Construction/Engineering

1.12x

Healthcare Information and Technology

5.29x

Trucking

1.81x

Insurance (General)

2.66x

Investments & Asset Management

5.42x

The tables above show that the average valuation multiples by industry can vary for different financial metrics.

Even for the same industries, EBITDA multiples are higher than revenue multiples. EBITDA better indicates a company’s profitability and earnings potential, unlike revenue, which only shows the total annual income but doesn’t consider the costs.

Tip: Our free valuation calculator can also help you estimate the value of your company based on its revenue.

SDE Multiples by Industry

The table below shows private SaaS company valuation multiples for different sub-sectors based on the seller's discretionary earnings (SDE), according to a First Page Sage report:

SDE Range and Average SDE Multiples

Saas Sub-Sector

$500k-1M

$1M-2M

$2M-3M

E-Commerce

7.1x

8.7x

9.4x

Healthcare/MedTech

7.6x

8.8x

9.8x

Communication

7.7x

8.3x

8.7x

Human Resources (HR)

8.0x

8.6x

9.7x

Financial/Fintech

7.7x

8.4x

9.3x

Real Estate/Proptech

6.5x

7.8x

9.1x

Seller's Discretionary Earnings refer to an owner's total financial benefit from their business. The SDE multiple method is ideal for smaller businesses with a single owner or owner-operator.

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How Does Valuation Using Multiples Work?

Calculating the value of your company using multiples can be easier than you think.

Here's a quick breakdown of how the process works:

• Choosing the Right Valuation Method: Since the multiples are market-based, you can draw them from the market analysis using ‘precedent transactions’ or ‘comparable company analysis.’
• Consider Recent Sale Prices and Multiples: Financial data from similar businesses can show you how much they sold for and the multiples they sold at (Precedent transactions). Divide the sum of the multiples by the number of businesses considered to obtain the average multiple.
• Consider Current Valuations and Multiples: You can also look at financial data from similar businesses to see how much they are valued relative to various financial metrics like revenue or EBITDA (comparable company analysis). Get the multiple by dividing the business value with financial metrics. Determine the average multiple by dividing the sum of the multiples by the number of businesses considered.
• Determine Your Business's Value: Calculate the estimated value of your business by multiplying its available financial metrics with the corresponding market-based multiples. For example, multiply your annual EBITDA with the average EBITDA multiple.

Even though the valuation process sounds fun, it can be overwhelming because of the many steps involved. For example, you may not know the best similar businesses to pick.

At Exitwise, we can connect you with industry-specific M&A experts who can help you value your business faster and more accurately. They can also help you discover strengths such as growth potential, which can maximize your business sale.

Reach out to our team today to find the best M&A experts to streamline your exit strategy.

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Examples of Small Business Valuation Using Multiples

You can use various multiple-based formulas to calculate business valuations by industry.

Let's apply some formulas to some examples to obtain valuations based on the corresponding multiples from the tables above:

Software Company Valuation

Here's how to value your software company using the’ software companies valuation multiple’ from the first table and assuming an annual EBITDA of $4.4M:

Business Value = Annual EBITDA x EBITDA multiple = $4.4 x 19.33 = $85,052,000

Construction Company Valuation

To calculate the value of a construction company using the construction company valuation multiple from the second table above and assuming your business has an annual revenue of $3.2M:

Business Value = Annual Revenue x Revenue Multiple = $3.2M x 1.12 = $3,584,000

SaaS Company Valuation

Using the SaaS valuation multiples from the third table and assuming your business in the e-commerce sub-sector has $2.5M in SDE, here's how to calculate its worth:

Business Value = Annual SDE x SDE multiple = $2.5M x 9.4 = $23,500,000

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Pitfalls of Applying Industry Multiples for Business Valuation

While using business multipliers by industry is easy, the process is fraught with several pitfalls, such as:

• Significantly Ignoring Company Characteristics: You risk oversimplifying the valuation of your company because the multiples ignore crucial business aspects that may tremendously increase valuation. Such elements include key talent, the quality of management, and competitive advantage.
• Underestimation and Overestimation: You may underestimate your business's value, leaving money on the table when you sell. If you overestimate the value, you may scare away potential buyers.
• Unreliability Due to Market Volatility: If you rely on valuation multiples alone, your business's value typically fluctuates as the market changes. The valuations can be unreliable during periods of low or high volatility or significant one-off events.

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Maximize Your Business Valuation with Exitwise

Working with the right M&A experts can help you avoid the above pitfalls and streamline your exit planning. You can get insights into the correct multiples to use, how profitable your business is, and how much growth potential it has.

We can help you hire and work with the best M&A team and business valuation experts in your industry, including wealth advisors, finance accountants, investment bankers, and M&A attorneys.

Plan a consultation with the Exitwise team today to learn more about maximizing your business exit.

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Frequently Asked Questions (FAQs)

Let's end today's discussion with a few questions people usually ask about small business valuation multiples:

Is Using Industry Valuation Multiples Enough to Determine Business Value?

Using industry valuation multiples is not enough to determine business value. While they can give fairly accurate estimates of the value, it’s always advisable to use other methods as a checkpoint.

For example, you can use the discounted cash flow method because it offers a more intrinsic valuation of your business.

How Can I Identify the Right Valuation Multiple for My Small Business?

You can follow the quick steps below to determine the right business valuation multiple for your business:

1. Determine your valuation objective to find a multiple that captures your key value drivers and the expectations of all the stakeholders.
2. Identify the key financial metrics available, such as EBITDA, revenue, or seller's discretionary earnings.
3. Identify similar businesses in your industry or market based on financial health, size, operational efficiency, and development stage, among other aspects.
4. Check what financial data is publicly available for these businesses.
5. Determine the valuation multiples for the businesses using the data you get. If the multiples aren't available, divide the business values with the corresponding financial metrics.
6. Determine the average multiples and standard deviations. Check for any anomalies or outliers significantly differing from the rest of the data. These may skew standard deviations or averages and distort valuations.
7. Determine these outliers or anomalies using statistical methods such as interquartile ranges (IQR) or z-scores. According to Penn State University, a common rule of thumb is to consider any data sets over 1.5 times the IQR above Q3 or over 1.5 times the IQR below Q1 as outliers.

Can Small Businesses in the Same Industry Have Different Multiples?

Small businesses in the same industry can have different multiples because they are separate entities with different unique characteristics.

For example, one business may have a significant loyal customer base, while the other may have only a few returning customers. The one with more repeat customers typically has a higher valuation multiple.

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Conclusion

Although small business valuation multiples are easy to use, pinpointing the right valuation multiple and financial metrics to use can be tricky.

In this guide, we've discussed how valuation multiples work, how to choose the right one, the key factors that affect the multiples, and how to apply them to value your business.

Working with us at Exitwise can save you time and effort that you can dedicate to streamlining your exit plan.

We can help you work with M&A experts who can optimize your business valuation process and help you secure the best sale price possible when it's time to sell.

Schedule a chat with us today to hire the best M&A experts to maximize your business sale.