Quazar Quips© Volume 1, Issue 3
“The Meaning of Multiples”

Businesses are generally valued off of the operating cash flow they produce. As discussed in Quazar Quips Issue 2, there are different ways to calculate a company’s operating cash flow. But for the purposes of valuing companies in the business brokerage marketplace, Seller’s Discretionary Earnings (SDE) is most commonly used (EBITDA is also sometimes used, albeit less commonly). To come up with a company’s value, buyers often apply a “multiple” to SDE to determine the company’s value. Multiples vary widely across industries and size ranges and are greatly impacted by a company’s growth, size, and overall economic conditions. 
To demonstrate how much variance there is in multiples across industries, some “rules of thumb” from the 2016 Business Reference Guide (published by Business Brokerage Press and compiled by Tom West) are listed below. Please keep in mind these “rules of thumb” can greatly vary from company to company, are largely impacted by company size, and are subject to working capital needs.

  • Direct Mail Advertising: 2 to 2.5 times SDE (plus inventory)
  • Distributor/Wholesaler of Durable Goods: 2 to 2.5 times SDE (plus inventory) or 4 times EBITDA
  • Metal Fabrication: 4 to 4.5 times SDE (plus inventory) or 4 to 6 times EBITDA
  • Lumberyards: 4 to 6 times SDE (includes inventory) or 4 to 6 times EBITDA
  • Publishers – General: 3 to 7 times SDE (includes inventory) or 5 to 7 times EBITDA

“It’s far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price” – Charlie Munger (Vice-Chairman, Berkshire Hathaway) No matter what your investment strategy entails, it is necessary to deeply evaluate a business on its own merits. The “rules of thumb” listed above are intended to be just that and should be used as only a starting point when determining a business’s value. Clearly, every business is unique and should be treated accordingly when using a multiple to determine value. 

Thank you for reading Quazar Quips, a monthly newsletter discussing the Business Brokerage market for deals between $1 million and $5 million in value.  Each month, Quazar Quips will keep you informed about statistics, trends, helpful thoughts within the Business Brokerage deal space.  Stay tuned for next month’s newsletter, where we will discuss “Who Should be Involved in the Selling Process?”  If you or someone you know is thinking about selling their business, please contact Adam Webb at (763) 550-9555.
Contact Us
Adam Webb, Managing Director adamw@quazarbusinessbrokerage.com
Bruce A. Behm, Founder bruceb@quazarbusinessbrokerage.com
Phone: 763-550-9555 www.quazarbusinessbrokerage.com

Bruce Behm is a licensed real estate broker of Quazar Business Brokerage
Quazar Business Brokerage©, 3535 Plymouth Boulevard, Suite 210, Minneapolis, MN  55447