Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

October 7, 2021

Which Multiplier?

By Achim Neumann

Multiplier

“I know the value of my business, it’s one and a half times sales,” said the business owner and was firmly convinced that any business appraisal would come to the same conclusion and thus, worthless.

However, in reality, applying a single multiplier is simply the worst mistake a business owner can do, in particular, if the selling of the business is the last step in monetizing many years of hard work in building the business.

Indeed, if only a single multiplier – such as sales in this example – is needed to establish a value of a business, then the world would be a very simple place.

But, if of two similar companies with the same sales level, one company were highly profitable, while the second is unprofitable, would buyers indeed value both companies the same by applying a multiplier to sales? Barely!

“Obviously, any savvy investor will look beyond a single multiplier valuation, indeed, most often, investors will look for cash flow being generated by the company as the most important criteria,“ says Achim Neumann, President, A Neumann & Associates, LLC, a New Jersey based Business Brokerage and M&A Advisory firm, helping mid-sized businesses to transfer business ownership.

So what are the “right” ratios to define a company’s value? Accredited, professional business valuation firms use a variety of different metrics in arriving at a Fair Market Value for a business – encompassing Balance Sheet and Profit & Loss data, as well as “real world” transaction closings:

Asset Based Business Valuation:

Cash Flow Based Business Valuation:

  • Single Period Capitalization Method
  • Excess Earnings Method

Market Based Business Valuation:

  • Historic Comparative Closings Based on Revenue
  • Historic Comparative Closings Based on Seller Discretionary Cash Flow
  • Historic Comparative Closings Based on EBITDA

Typically, a valuation firm first develops a market value based on each of these individual approaches, then weights each approach and uses the weighted average as the final Fair Market Value.

How does the valuation firm know the derived value represents the “right” value?

Generally speaking, the valuation firm will “test” the derived value against some plausibility checks. For example, a “Price Justification Chart” will be established to determine, if the derived value provides a realistic ROI for an investor. Further, a multiplier of EBITDA will indicate, if the derived value falls within the band with of previously closed transactions.

In short, a multitude of different metrics are being applied in arriving at a Fair Market Value for a company, and there is no such thing as one-multiplier defining a market value.

As a matter of fact, a single multiplier valuation is almost always wrong in defining the value of a business, and an incorrect value can be the reason for a business owner to leave “a lot of money on the table” (in case of an under-valuation), or to never sell the company while compromising confidentiality in the process (in case of an over-valuation).

And looking from an economic point of view, relying on a simple, one-multiplier valuation makes even less sense, given that the valuation expense is often less than 0.05% of a transaction – an amount, that can easily be re-cooperated in negotiations with a buyer by a well prepared owner with a properly valued business.

So, why rely on a single multiplier value determination and instead of having an accredited valuation in place?

About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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Client Testimonials

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

Double Diamond

“Used A Neumann & Associates to sale my business. could not imagine having done it with out the patience and experience Gary provided. Thanks Gary,”

Dennis Frazier

“Working with Marc and his company was a pleasure. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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If you are considering selling your business, please contact us to learn more about our comprehensive service spectrum. Our experienced professionals will answer all your questions about selling a privately held business in complete confidentiality. Please fill out our contact form, or call us at 732-872-6777. We will contact you directly and will never identify ourselves to your employees.

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