External Factors That Determine Your Business Value

When we work with business owners, we take some time to explain how we’ll determine the value of their business. Several factors go into determining how much the company is worth, including:

Brokers contribute anonymous data on deals that have been completed which is then used to compile actual sales data of privately held companies in specific industries.

Armed with the complete details and market knowledge, a skilled broker will work with the seller to sell their business for the best price possible.

There was almost no lending going on. The market was utterly stagnant because buyers couldn't get loans, and when they could, they were looking for bargains. That drove multiples down in every industry.

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Joe Shemansky     07/07/2022

External Factors That Determine Your Business Value

When we work with business owners, we take some time to explain how we’ll determine the value of their business. Several factors go into determining how much the company is worth, including:

  • Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)
  • Cash Flow
  • Seller’s Discretionary Earnings or Owner’s Benefit

We usually look at the last three to five years’ worth of a business’s financial statements, tax returns, and the most recent balance sheet. Beyond the business’s profitability, there are several other factors that can determine a business’s market value. One example would be how involved is the owner in the day-to-day operations or is there a good management staff in place? Brokers can use different strategies to determine the market value of a company, the most common is the use of an industry multiple. The multiples are determined by historical data collected by business brokers sold deals and industry data mined through organizations like IBISWorld or DealStats for each specific industry. Brokers contribute anonymous data on deals that have been completed which is then used to compile actual sales data of privately held companies in specific industries.

It’s very important to have a business broker as part of your team when you’re considering selling your business.  Many business owners may have a figure in mind of what they want for their business; a good business broker can educate you on what the market determines the true business value is and how that price is achieved.  Armed with the complete details and market knowledge, a skilled broker will work with the seller to sell their business for the best price possible.

You may hear stories of unicorn buyers who are willing to pay large multiples, but an experienced broker knows that the best predictor of future behavior is past behavior. That’s why data about the sales of companies like yours are the most useful information you should consider when setting a price for your company.

Multiples and values rise and fall based on many factors, some of them external. One of the most important is how easily buyers can obtain capital. For example, during the Great Recession of 2008 – 2009, the financial markets dried up. There was almost no lending going on. The market was utterly stagnant because buyers couldn’t get loans, and when they could, they were looking for bargains. That drove multiples down in every industry.

By 2011, money was flowing again, but there were more sellers than buyers, and multiples remained low. It wasn’t until 2018 and 2019 that we saw a strong market for sales and multiples rising. Then came 2020, and an unprecedented event that changed everything. Of course, not all businesses suffered during the pandemic lockdowns – some thrived. And the government’s response to prop up businesses actually accelerated the market for business sales.

Not only did the Paycheck Protection Program payments help companies weather the storm, the CARES relief package included a Small Business Administration program that spurred lots of business sales. The SBA forgave six months of loan payments during 2020, so buyers were willing to take more risks and pay more for businesses.

Now, inflation is forcing the federal reserve to raise interest rates, which will eventually affect the market and what buyers are willing to pay. All this to say that the external market conditions will affect your company’s value because supply and demand will always impact prices. Too many buyers chasing too few businesses will raise prices; when sellers outnumber buyers, prices and multiples will decrease.

That’s why business owners who plan their exit a couple of years in advance have a better chance of getting top value when they sell. They can wait for the market conditions to improve and have time to make adjustments in their companies, such as upgrading equipment and systems or adding management, which will raise the company’s value before they find a buyer.

In the next post, we’ll discuss the internal factors that will affect your company’s value.


This blog was originally written by Joe Shemansky, MCBI, M&AMI, CM&AP, CBI. Joe is the Principal Broker-Owner of We Sell Construction Businesses (www.wesell construction businesses.com), which is headquartered in Clermont, Florida. We Sell Construction Businesses provides business brokerage and M&A transaction services to main street and lower middle market construction business owners, looking to sell their businesses. He can be contacted at 352-404-9191 or joe@wesellconstructionbusinesses.com.

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