Small Business Multiplier: A Guide for Retiring Baby Boomer Business Owners in California
Using a business multiplier for small businesses (ranges from 1x to 5x seller discretionary earnings or SDE) is a quick way to find your small business valuation and its worth.
As a California retiring business owner, you might be asking yourself this question: “what’s my company’s worth”?
The business multiplier method calculates the value of a small business by multiplying the average annual earnings of the business by a specific multiplier average between 1x to 5x.
In this post, we will provide a comprehensive guide on how the business multiplier method works for small businesses, its advantages and disadvantages, and how retiring baby boomer owners in California can use it to determine the value of their businesses.
Understanding the Business Multiplier for Small Business
The business multiplier method calculates the value of a small business by multiplying the average annual earnings of the business by a specific multiplier.
This multiplier is typically based on industry averages and can vary depending on factors such as the size, profitability, and growth rate of the business.
It is important to note that the multiplier valuation method is just one of the many methods available for determining the value of a small business in California.
Therefore, it is crucial to seek expert advice when valuing a small business and considering options for retirement.
A business valuation professional can provide a more comprehensive analysis, considering unique or proprietary assets and the current economic climate.
How the Business Multiplier is Calculated
The calculation of the company valuation multiplier is relatively straightforward. The process involves the following steps:
- Determine the financial metric to use: The financial metric used in the company valuation multiplier is typically market capitalization or enterprise value divided by one of the following: revenue, earnings, or cash flow.
- Research the industry average multiplier: The next step is to research the industry average multiplier for companies in the same industry as the one being valued. This information can be found in industry reports or by consulting a business valuation expert.
- Calculate the current multiplier: Once you have both the market capitalization or enterprise value and the financial metric, divide one by the other to determine the current multiplier of the company.
- Project future financial performance: Using historical financial data, project the company’s future financial performance for the next period, such as the next fiscal year.
- Apply the industry average multiplier: Take the projected future financial performance and multiply it by the industry average multiplier to estimate the future value of the company.
For example, if the company’s market capitalization is $5 million and the revenue is $1 million, the current multiplier is 5. If the projected revenue for the next fiscal year is $1.2 million, and the industry average multiplier is 5, the future value of the company would be $1.2 million x 5 = $6 million.
Calculation Example
An example calculation using the company valuation multiplier method for a manufacturing company in California:
- Let’s assume the manufacturing company had an enterprise value of $1,000.000 and its profit is $400,000
- According to industry reports, the average multiplier for manufacturing companies in California is 3x.
To calculate the current multiplier,
- Take the enterprise value ($1,000,000) and divide it by the current profit ($400,000)
- $1,000,000 / $400,000 = 2.5x
So, based on this calculation, the current multiple of the manufacturing company is 2.5x.
Next, let’s take the assumption of increasing profit by $150,000 for the next fiscal year. This brings a Projected Profit of ($400,000) Current + ($150,000) Project Increase Amount = ($650,000) Projected Profits For The Next Fiscal Year.
Now, apply the average industry multiple in this final valuation formula below:
Take the projected next year’s profit ($650,00) then multiply it by the average industry multiplier (3x) is equal to the business valuation.
Formula: $650,000 x 3 = $1,950,000
With this calculation, we can determine the future value of the manufacturing business to be $1,950,000 by the next fiscal year.
Be aware, it’s essential to keep in mind that this is just a rough estimate and other factors such as:
- the size,
- profitability,
- growth rate,
- and the current economic climate of the business should be taken into account as well.
Nonetheless, it’s also recommended to seek help from a professional when valuing a business. A business valuation expert can provide a more comprehensive analysis, considering all factors that might positively or negatively influence the business valuation of a small company.
Pros and Cons
The company valuation multiplier method has its pros and cons.
On the positive side, it’s easy to calculate and find your company’s worth quickly. It also provides a market comparison to other similar businesses in the industry.
Nonetheless, it does have its boundaries.
With limitations, the company multiplier for small businesses doesn’t take into account any unique or proprietary assets a business may have, such as patents or trademarks.
Additionally, it doesn’t take into account the current economic climate in California, which can greatly affect the value of a business.
UCLA Director Jerry Nickelsburg
According to UCLA Anderson Forecast Director Jerry Nickelsburg.
- Unlike the tech meltdown in 2001, when layoffs were concentrated among information technology jobs in the Bay Area, this year’s tech purging has had little effect on the California economy
- Housing construction is an area where California is outpacing the rest of the country
- Defense spending is also helping the California economy
- UCLA Anderson Forecast Director Jerry Nickelsburg projected employment growth of 1.1% in 2023 and 1.2% in 2024 for California if the state does not go into recession and employment growth of .5% in 2023 and 1.3% in 2024 if it does
In a positive economic environment, one can be optimistic about the buy-sell market mainly in manufacturing among other industry sectors in California.
Multiplier Method: Profit Valuation Options
While the multiplier method for small businesses can provide a quick valuation option to retiring business owners in California, it’s essential to keep in mind that it’s just one of many earning or income valuation methods available.
There are several other methods commonly used in addition to the business multiplier method for determining the value of a small business.
Profit Multiplier Valuation
This method of valuing a business is by multiplying the business’s net profit by a specific multiplier.
The net profit of a business is calculated by subtracting all of the business’s expenses from its revenues.
The specific multiplier used in profit multiplier valuation is typically based on industry averages and can vary depending on factors such as the size, profitability, and growth rate of the business.
The purpose of profit multiplier valuation is to arrive at a value for a business based on the profit it generates.
This method can be useful for businesses with a consistent and predictable net profit, as it is easy to calculate and understand. However, it is essential to note that it doesn’t take into account any unique or proprietary assets a business may have, such as patents or trademarks.
Additionally, it doesn’t take into account the current economic climate which can greatly affect the value of a business.
Profit multiplier valuation is also known as the “earnings multiplier method” or the “price to earnings ratio method”. It is widely used in valuation and financial analysis, but it’s essential to use it in conjunction with other methods, such as discounted cash flow, to arrive at a more accurate valuation.
Formula & Calculations: Profit Multiplier Valuation
The calculation of profit multiplier valuation is relatively quick to apply. The process involves the following steps:
Step One: Determine the Net Profit of the Business
The net profit of a business is calculated by subtracting all of the business’s expenses (such as costs of goods sold, operating expenses, taxes, etc.) from its revenues. This will give you the business’s net profit for a specific period.
Step Two: Research the Industry Average Multiplier
The next step is to research the industry average multiplier for businesses in the same industry as the one being valued. This information can be found in industry reports or by consulting a business valuation expert.
Step Three: Multiply the Net Profit by the Industry Average Multiplier
Once you have both the net profit and the industry average multiplier, simply multiply the two to determine the value of your business. The resulting value is the estimated worth of the business.
For example, if the net profit of a business is $100,000 and the industry average multiplier is 3, the value of the business would be $100,000 x 3 = $300,000
Keep in mind to seek professional help from an expert to get the best appraisal for your company. Their advice can run multiple valuation methods based on your company’s situation. A clear business valuation is key to successfully selling your business now or in the future.
Discounted Cash Flow (DCF)
This method calculates the present value of the future cash flows that a business is expected to generate. The present value is calculated by discounting the future cash flows using a discount rate.
Seller Discretionary Earnings (SDE)
This method is used to value small businesses by adding back non-cash expenses and discretionary expenses to net income. It provides insight into the cash flow available to the business owner but should be used with other methods and professional advice for a more accurate valuation.
Keep in mind to seek professional help from an expert to get the best appraisal for your company. Their advice can run multiple valuation methods based on your company’s situation.
A clear business valuation is key to successfully selling your business now or in the future.
Rogerson Business Services For Business Valuation Service
When determining the value of a small business in California, it is crucial to seek professional advice. A business valuation expert can offer a more thorough analysis, considering the company’s unique assets and current economic conditions. By considering all the factors and consulting an expert, retiring small business owners can make the most well-informed decision.
As you consider your options for retirement, it’s crucial to not only determine the value of your business but also consider the different options available to you such as selling the business, transferring it to a family member, or sadly the last undesirable option is closing it.
By considering all the factors, you can make the most informed decision for your business and your future.
Let’s say you are now considering exiting your small business ownership, to understand this better, we recommend engaging the help of a certified broker with a professional team of advisors in California.
In brief, let’s dive in with some essential starting points to get you ready.
Is Now a Good Time To Sell My Business?
The current economic climate in California is favorable for selling and exiting a company. If you’re considering selling your manufacturing company, valuing it is a crucial first step.
The process of valuing a manufacturing business can be challenging, but, you don’t need to struggle anymore. A business broker can help you navigate the process and sell your manufacturing company by following five simple steps.
- The first step is to understand how manufacturing companies are valued. The most common method used to value a manufacturing company is by using EBITDA multiples. Ebitda, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s profitability. Manufacturing companies usually have market EBITDA margins, so their EBITDA multiples are usually similar to the average market multiples and sometimes higher than other industries.
- The second step is to understand what factors will affect the value of your manufacturing company. The three most important factors are the size of the company, the profitability of the company, and the growth potential of the company.
- The third step is to understand what buyers are looking for in a manufacturing company. The most important factors that buyers look for are the size of the company, the profitability of the company, and the growth potential.
- The fourth step is to find a buyer who is willing to pay your asking price. The best way to find a buyer is to hire a business broker.
- The fifth and final step is to negotiate the sale price of your manufacturing company.
Remember that for a smooth transition, it is beneficial to seek the guidance of a business broker. Valuing a manufacturing company is not an exact science, but by following these steps, you can get the best possible price for your company.
The most important aspect is to use a method that is suitable for your unique situation. Keep in mind that valuations can be influenced by various factors, so it is crucial to be aware of all the factors that could affect the value of your company.
This is just a quick overview of how to value a manufacturing company. If you’re interested in learning more, there are many resources available on our blog.
References:
- How To Increase Company Valuation? 4 Value Drivers You Need To Know
- What is Quality of Earnings Analysis: Sell a Business Due Diligence in California
- Adjusted Financial Statements When Selling a Business in California
- SDE Adjustments To Make Before Selling a Business in California
- How Do I Calculate The Value Of My Business To Sell In California
- What is My Business Worth? | Valuing and Selling Your Business
- How Much is a Business Worth to Sell | Determine Business Worth
- Income Approach Valuation | Finding Business Worth Easy
- How To Value A Business Quickly: Best Business Valuation Formula
- Seller’s Discretionary Earnings (SDE) Valuation | Selling a Business in California
- Valuation Formula: 10 Most Used Calculations
- Small Business Valuation Multiples Simplified
Do you have any questions about how to value a manufacturing company? Leave a comment below and we’ll be happy to help!
Final Take: Business Multiplier for Small Company
As a retiring baby boomer business owner in California, gaining knowledge on how the business multiplier valuation method works are important for a quick appraisal. By consulting an expert, and evaluating all your options, you can make the most informed decision when determining the value of your business and planning your retirement.
Contact Rogerson Business Services to help you with more information today!
With a manufacturing business broker at your side, we feel confident that you will sell your manufacturing company at the highest price.
If you are considering valuing and selling your manufacturing company with yearly revenue between $500,000 to $1,500,000 within six to twelve months, give Andrew Rogerson a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com covering the whole state of California.
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