What is the “average” market multiple for valuing a privately held business?
Clients often ask for the “average” market multiple when they want to estimate the value of their privately held business. The trouble is that an average multiple is based on an “AVERAGE” business and most businesses are not “average”. Some are much higher than average while others are lower. Market multiples are usually much higher for a business that is “above average” and they are much lower for a business that is “below average”.
A better approach is to break the market multiples into quartiles based on the quality of earnings and compare your business to the appropriate quartile. For example, market comps with earnings in the lowest quartile (0-25%) might have an EBITDA multiple of 0.5x while those in the highest quartile (75-100%) might have a multiple of 4.0x. Do the same for the 2nd and 3rd quartile.
Next, compare your business to see which quartile you fall into based on the quality of your earnings. Be honest. Now use the appropriate market multiple to determine an estimate of the value of your business. Chances are that the value you arrive at is not the same as using the “average” market multiple.
Using market multiples to calculate value can be confusing, and small mistakes can change the calculated business value by hundreds of thousands of dollars. You took the time to build your business, now make sure you get credit for all your hard work. Talk to a Business Valuation Professional to make sure you are not selling yourself short. Call Scott Abels at 512-673-3530 to learn more.