What multiple will my business sell for?

No page can say what multiple a particular business will sell for. The buyer sets it, after testing the business. Five things move it: growth, customer concentration, quality of earnings, dependence on the owner, and a plan a buyer can test.

This page is for owners of established businesses. The seller check's questions are written for businesses of about A$50 million (US$35 million, £25 million) in revenue and up.

How is a sale price built?

The price is usually a multiple of last year's earnings. Buyers use EBITDA, which is earnings before interest, tax, depreciation and amortisation. Enterprise value is EBITDA times the multiple. The owner's equity is enterprise value less net debt.

So the price rests on two numbers. One is the earnings a buyer accepts. The other is the multiple it applies to them. Each of the five things below moves one or both.

What moves the multiple up or down?

• Growth already in the numbers. A buyer pays for growth it can see in the run-rate. Growth that begins after the sale is the buyer's upside, and the buyer prices it as its own.
• Customer concentration. The bottom answer on this question in the seller check reads "One customer is the business, on a handshake." A buyer prices the chance that the customer leaves. Contracts and relationships held by more than one person lower that chance.
• Quality of earnings. The multiple applies to the earnings a buyer accepts. Add-backs without evidence are argued down or taken out. Each dollar taken out comes off the price at the multiple.
• Dependence on the owner. When every price, hire and large customer goes through the owner, a buyer is buying a person. A buyer will discount for that or walk away.
• A plan a buyer can test. A buyer's advisers lay the plan against three years of history and against the market. Then they price the business on the plan they believe.

Where does an owner find a multiple for their own business?

No table of multiples on a web page is safe to rely on. Tables of listed companies overstate what a private business of this size sells for. Tables of small-business sales understate it. An owner who relies on either can price the business wrongly.

Three sources come closer:

• An appraisal of the business itself, by a broker or a corporate finance adviser.
• Recent sales in the sector whose terms the owner knows.
• Listed peers, less a discount for being private and smaller.

Each gives a range. The five things above decide where in that range a buyer lands.

Which of these can an owner change before a sale?

All five can move. They move at different speeds. Customer concentration and dependence on the owner take years to change. So does a growth engine that already produces revenue.

A plan bridged to the record takes months. So does a forecast record a buyer can check. Clearing what the financial diligence will find also takes months. Preparation for a sale starts twelve to twenty-four months before a process.

The next step

Take the seller check, then put your own figures through the exit value bridge, the customer concentration calculator and the EBITDA add-back sorter. No email before your result. No sales call after it. No list. Delete on request.

Related questions

• What is exit readiness?
• Is an earn-out a good idea for the seller?
• Should I sell to private equity or a trade buyer?

This page is drawn from the seller check's grid, three deal calculators and the exit readiness article on onestepright.