Do you need to determine the value of an auto dealership? Here are some industry statistics to consider.

New and used car dealerships are a significant part of the automotive retail and services industry. Classified under the SIC code 5511 and NAICS 441110, there are some 43,600 such establishments in the US alone. The industry sector generates a respectable $343.1B in annual sales employing over 953,000 people. An average auto dealership is a privately owned firm with about $13M in annual sales and a staff of 33.

Auto dealership business valuation by market comparison

Auto dealerships are ubiquitous, many successful companies becoming institutions in their markets. There is a growing trend toward consolidation with smaller independent dealers being bought out by larger companies. As a result, successful privately owned dealerships are frequent acquisition targets.

This is good news if you decide to value an existing auto dealership using the market approach, i.e. by comparison to recent sales of similar companies – there are plenty of business sales to compare against.

The usual tools to value an auto dealership under the market approach are valuation multiples.

The multiples are ratios that let you calculate what is known as the enterprise value of a company based on the selling prices and financial performance of similar firms.

The valuation multiples commonly used for valuation of auto dealerships are these:

• Enterprise value (EV) divided by revenues (net sales)
• EV to EBITDA

The product inventory may be factored out of the multiplication and added on top to come up with the enterprise value of the business.

Example: Valuation of an auto dealership business

To demonstrate the concept, let’s pick a typical new and pre-owned car dealer with the following financials:

• Revenue: $13,000,000
• EBITDA: $1,000,000
• Inventory: $2,250,000

Next, we choose a set of reasonable valuation multiples to calculate the business value estimates:

Another way to report these results is as a range of values, from low to high, i.e. $3,940,000 – $4,700,000. The expected business value then should fall somewhere in between.

If you are thinking of valuing an environmental consulting company, here are some key industry statistics to ponder. The industry sector, classified under the SIC code 8748-9905 and NAICS code 541620, consists of over 13,370 firms, mostly in private ownership. Many companies specialize to provide high value services to their public and private clients, including:

• Environmental management consulting
• Environmental inspections, service assessment and remediation
• Hazardous waste disposal
• Resource conservation
• Energy infrastructure management
• Technology and information systems consulting

Together, these companies generate an impressive $9.32B in annual revenues and employ over 96,800 people.

Yet an average environmental consulting company is quite small – with $800,000 in annual sales and 7 professional and administrative staff.

Business valuation of environmental consulting and engineering companies

Strong relationships with existing clients and new business referrals tend to contribute to steady earnings and solid project pipeline that ensures the company’s future. Successful environmental businesses often become respected institutions in their market which fuels business growth.

Such profitable firms are highly desirable acquisition targets. Recent selling prices in the sector can provide you with a foundation on which to base the appraisal of your own company.

The usual way to do such market-based comparison of business value is to use the valuation multiples. These are the ratios that relate the business selling prices to the sold firms’ financial performance measures.

Here is the short list of typical valuation multiples you may consider in valuing an environmental consulting business:

• Business enterprise value (EV) divided by revenues (net sales)
• EV to EBITDA
• EV to seller’s discretionary cash flow (SDCF)
• EV to total business assets
• EV to book value of owners’ equity

Example: Environmental consulting business valuation using multiples

To demonstrate the idea, let’s pick a typical professional environmental company with the following financials over the last twelve months:

• Revenue (net sales): $800,000
• EBITDA: $250,000
• SDCF: $323,000
• Total business assets: $370,000
• Book value of owners’ equity: $545,000

Next, we use the the valuation multiples derived from similar sold firms so that we can calculate the business value for our sample company:

Surprised by the spread of values in this table? Actually, this is not unusual when doing market comparisons. The reason is that each company is different. So, for example, our sample business profitability, expressed as EBITDA, is high for its level of sales.

In addition, the owners have accumulated considerable equity, perhaps by retaining earnings or managing the company capital structure with minimal debt. As a result, the business value estimates based on these two measures appear higher.

Alternatively, you can view these results as establishing a range of values for the business, from low to high like this:

Residential and commercial real estate appraisal firms comprise a large segment of the real estate services industry. Classified under the SIC code 6531 – 9901 and NAICS 531320, there are some 28,000 such companies operating in the industry in the US alone.

Together these professional services firms generate just over $5.28B in annual revenues employing more than 82,700 people that include real estate appraisers, managers, and support staff. Yet an average firm in this sector is small – with the annual revenue of about $200,000 and 3 staffers.

Business valuation of real estate appraisal companies

Appraisal firms serve the essential function of establishing the value of assets in the real estate industry. For many business development requires lasting relationships with local and regional lenders and real estate agents. Successful appraisal companies tend to create strong bonds with their referral sources that contribute to a steady stream of new and recurring business.

Solid earnings and profitability make these companies highly desirable acquisition targets. So if you need to value an appraisal company in your market, comparison to the recent sales of other firms in the industry sector is an excellent place to start.

if you plan to use the market approach to valuing your appraisal company, valuation multiples are the typical tools. As a rule, the multiples let you calculate the enterprise value of your company based on the selling prices and financial performance of companies similar to yours.

Here are the common valuation multiples to consider in valuing an appraisal firm:

• Enterprise value (EV) divided by revenues (net sales)
• EV to EBITDA
• EV to seller’s discretionary cash flow (SDCF)
• EV to total business assets
• EV to book value of owners’ equity

Example: Valuation of a real estate appraisal business using multiples

As an example, let’s analyze an average real estate appraisal company with these annual financials:

• Revenue: $200,000
• EBITDA: $95,000
• SDCF: $145,000
• Total business assets: $180,000

Using the valuation multiples obtained from similar appraisal firms we can calculate the business value as follows:

You may notice quite a bit of variation in the results using the different valuation multiples. This depends to a large extent on how the subject company compares to its industry peers. For example, a higher business valuation based on EBITDA may point to an appraisal company that is more profitable than its competitors.

Companies developing security software applications fall within the custom software industry sector. It is classified under SIC code 7371 and NAICS 541512.

Information systems security concerns in companies large and small are a major reason this sector of the software industry has experienced rapid growth in recent years. In 2011, over 49,000 US based firms have been responsible for over $65.4B in total annual revenues. The industry as a whole employs well over 555,000 professional and administrative staff.

Yet the vast majority of security software companies are considered small to mid-size businesses. The average firm produces about $1,500,000 in annual sales with a staff of just 12.

Business valuation of security software development companies

As with any software business, you have a number of well known valuation methods to value security application development firms. These companies are common acquisition targets so you can use the recent business sales as a guideline to estimate the value of a company in this industry.

These sales comparables are an important source of valuation multiples that you can use in calculating the business value in relation to a range of financial performance factors. Here is our short list of valuation multiples to consider:

• Enterprise value (EV) to gross revenues or net sales
• EV to seller’s discretionary cash flow
• EV to EBIT or EBITDA
• EV to hard assets such as Property, Plant and Equipment (PPE)
• EV to total business assets
• EV to book value of owners’ equity

Example: Using valuation multiples for security software company appraisals

Let’s pick a typical firm in this industry with the following financials to demonstrate the technique:

• Revenue: $1,500,000
• EBITDA: $250,000
• Total business assets: $1,200,000

We next apply the valuation multiples to the corresponding financial performance bases to calculate the business value:

As the above table shows, the calculated values can differ quite a bit. This depends on how our example business financials compare to its industry sector peers. For example, this company appears to be relatively asset rich for its level of revenues and profitability.

Are you preparing a valuation for a home remodeling contractor business? Here are some important industry stats to consider:

The home remodeling companies are usually classified within the specialty contractor industry sector under the SIC code 1799 and NAICS 236220. These businesses generate combined annual revenues of $41.96B. There are some 105,000 such firms in the US alone employing about 474,700 people.

Yet the average home remodeling company is a typical small business – with annual revenues of $400,000 and a staff of just 5.

Business valuation of home remodeling contractor companies

Established home remodeling contractors with a steady pipeline of projects often are profitable, highly desirable businesses. Such companies are sought after in acquisitions and the selling prices offer you an excellent way to estimate your own business value by comparison.

Valuation multiples calculated from these business sales comps are the valuation tools of choice under the market approach. The common valuation multiples used for home remodeling contractor valuations are:

• Business value to revenues (net sales)
• Business value to EBITDA
• Business value to hard assets such as Property, Plant and Equipment (PPE)
• Business value to total business assets
• Business value to owners’ equity

Example: Use of valuation multiples for valuation of home remodeling contractors

To illustrate the market-based valuation technique, let’s pick a typical home remodeling company with the following yearly financials:

• Revenue: $400,000
• EBITDA: $58,000
• Total business assets: $165,500

Now let’s apply a set of reasonable valuation multiples derived from comparable contractor firms that sold recently and calculate the business value for our sample company:

You can use the average value calculated from all the estimates above, or establish your company’s worth as a range of values, from the low to high estimate.

Biotechnology companies comprise an important and growing industry, classified under SIC code 2836 and engaged in the research, development and marketing of diverse products for the health and biosciences industries.

There are 1,280 such establishments in the US alone generating about $24.2B in annual sales and employing just under 30,000. An average firm makes $22,900,000 in annual revenues with 25 staff.

Business valuation of biotech firms

Biotechnology companies may grow rapidly and achieve considerable profitability. As a result they are often the targets of acquisitions. Valuation methods based on the market of comparable business sales are quite common for valuation of businesses in this industry sector.

Valuation multiples are the typical tools under the market approach. They let you estimate the value of your firm based on the the enterprise values of comparable firms relative to their financial performance. The common valuation multiples used are:

• Enterprise value (EV) to revenues (net sales)
• EV to EBITDA
• EV to Property, Plant and Equipment (PPE) assets
• EV to total business assets
• EV to book value of owners’ equity

Example: Use of valuation multiples for biotech company value estimation

As an example, let’s pick an average biotechnology company with the following annual financials:

• Revenue: $22,900,000
• EBITDA: $800,000
• Total business assets: $1,800,000

Using the valuation multiples derived from comparable small cap firms we calculate the business value and summarize the results as follows:

The values may fall closer together or wider apart depending upon how well your specific biotech company matches the industry average across the various income and asset bases.

Application software companies are a large industry sector, classified under SIC code 7372 and composed of firms engaged in the development, production and marketing of specialized software products.

In this day and age virtually all industries rely on some form of business software to power their operations. As a result the application software sector continues to grow. As of 2011, some 17,800 US players have chalked up a grand total of over $163B in annual revenues. The industry employs some 255,000 with an average of 15 staff per firm.

While the application software industry is well know for its multi-billion dollar industry titans, most software firms are small to mid-size businesses. In fact, the average application software development company generates close to $10M in annual revenues. About 92% of the companies employ less than 25 people and contribute $19.8B in annual sales to the sector’s total.

Business valuation of application software firms

Given the growth rates often achieved by software firms along with their profitability potential, emerging companies are frequent acquisition targets. Market-based valuation methods are quite common when valuing businesses in this industry.

Valuation multiples relating the enterprise values of comparable firms to their financial performance are the typical tools to appraise a business in this industry. The most common valuation multiples used are these:

• Enterprise value (EV) to revenues (net sales)
• EV to EBITDA
• EV to Property, Plant and Equipment (PPE) assets
• EV to total business assets
• EV to book value of owners’ equity

Example: Using valuation multiples to value an application software company

To demonstrate the application of multiples, we pick a sample software company with the following annual financials:

• Revenue: $10,000,000
• EBITDA: $1,800,000
• Total business assets: $14,300,000

Applying the valuation multiples to each financial measure basis, we calculate the business value as shown in the table below:

In this example the business value estimates across all valuation multiples fall pretty close together. The spread of valuation results can be considerably greater depending on how well the subject business performs against a specific financial measure compared to industry peers.

Do you need to value a retail pet store? Here are some industry statistics to consider first:

Pet stores are classified under the retail industry SIC code 5999 and NAICS 453910. Pet retail establishments make up a large portion of the miscellaneous retail industry. In the US there are just under 169,000 such operations.

This retail sector creates a total of $58.8B in annual revenues, and employs some 732,900 people. However, a typical pet store is small business: producing an average of $400,000 in sales per year with 4 staff.

In fact, 97.7% of pet retail businesses have 24 or fewer employees. Together these small, local businesses generate about 68.7% of the industry total annual revenues.

Well-established, successful pet retail businesses develop loyal customer following. The result is highly stable earnings year after year. Such cash cow operations are attractive acquisition targets.

Hence, an excellent way to estimate the fair market value of your pet retail store is to study the recent sales of similar businesses.

Pet store valuation using multiples

You can choose a number of valuation multiples for your business valuation. The multiples are ratios that relate the selling prices to some measure of sold companies’ financial performance. Here are the typical valuation multiples used in pet store appraisals:

• Price to net annual sales
• Price to gross profit
• Price to net income
• Price to EBIT and EBITDA
• Price to seller’s discretionary earnings
• Price to total practice assets
• Price to owners’ equity

Consider using several of such valuation multiples for increase the accuracy of your business valuation.

Each multiple gives you a business value estimate that may differ depending on how your pet store compares to its industry peers. The result can be a range of values, from low to high. Alternatively, you can calculate an average of all the business value estimates together.

Example: pet store valuation using multiples

To illustrate, let’s take a typical privately owned pet supplies store with the following financial details:

• Annual net sales: $400,000
• Gross profit: $180,250
• Net income: $30,000
• EBITDA: $32,750
• Discretionary earnings (SDE): $85,000
• Inventory: $55,000
• Furniture, fixtures and equipment assets valued at: $40,000

We next select a set of reasonable valuation multiples and apply them to the financial figures above. The practice value results are then:

Note the result spread. This depends on how our example pet store compares to its peers across the financial performance parameters.

Other pet store valuation methods

As with other types of businesses, a properly done business valuation should include several business valuation methods.

Established pet store businesses can build up significant business goodwill. The Capitalized Excess Earnings valuation method is a good choice when valuing such companies.

Direct capitalization methods, especially the Multiple of Discretionary Earnings valuation method are an excellent choice for valuation of privately owned pet stores. This method offers you a very systematic yet intuitive way to calculate the business value based on its earnings and a set of key financial and operational performance factors.

Insurance claims administrators and risk managers make up a significant part of the independent insurance industry service provider sector.

Some industry statistics

Classified under the SIC code 6411 and NAICS 524282, there are some 215,300 establishments concerned with independent insurance services in the US alone. The industry as a whole employs around 1,125,000 staff generating a total of $188.8M in annual revenues.

The typical insurance services firm is quite small with a staff of just 5 and the annual sales of some $1,000,000. The vast majority of these companies are privately owned.

Insurance administrators provide a range of essential services which include, among others:

• Design and administration of insurance plans for individual and business clients.
• Insurance investigation and fraud prevention.
• Claims administration services.
• Insurance verification and recovery service.

Insurance claims administrators with successful track record of earnings and loyal client base are desirable acquisition targets. Recent business sales give you an excellent basis for determining the fair market value of such firms.

Insurance administrator valuation using multiples

You can create a highly defensible estimate of business value by using valuation multiples derived from such comparable business sales. There a number of multiples to consider:

• Selling price to net annual sales
• Price to gross profit
• Price to net income
• Price to EBIT and EBITDA
• Price to total practice assets
• Price to owners’ equity

Your business value estimate should be based on a number of valuation multiples. Depending on the company’s earnings prospects and risk, each multiple can shed additional light on how the business does compared to similar firms in the industry.

The result is usually expressed as a range of business values, from low to high, along with the median and average values. You can also calculate your company’s value as an average of the figures given by each valuation multiple.

Example: using valuation multiples for insurance administrator company valuation

To show how such market-based valuation works, let’s take a typical insurance administrator service company with these financial parameters:

• Annual net sales: $1,000,000
• Gross profit: $920,000
• Net income: $225,000
• EBIT: $273,000
• EBITDA: $295,500
• Discretionary earnings (SDE): $385,000
• Total business assets valued at: $288,200

We next pick several valuation multiples and apply them to the financials above. Here are our business valuation results:

Each result is different. Why? It depends on how the company in the example compares to its peers for each financial performance parameter, e.g. business net sales, profitability or asset base.

Additional business valuation methods to consider

As a rule, defensible appraisal of an insurance administrator firm should use a number of professionally recognized valuation methods. To supplement the market approach we have shown above, consider using income based valuation methods such as the Discounted Cash Flow. For owner-operator managed firms the Multiple of Discretionary Earnings method is a good choice.

Business goodwill valuation in divorce and partner buyout

Established firms in this industry often create considerable business goodwill. A common problem is how to handle this in cases of marital dissolution in the jurisdictions that treat business goodwill as part of the marital estate. Often the goodwill needs to be separated into its personal and institutional parts based on the statutory or case law in your jurisdiction regarding the distribution of goodwill assets.

Choosing industry specific valuation multiples is one of the biggest challenges in business valuation. When done right, such “apples to apples” comparison offers you a very defensible way to demonstrate what a business is worth.

Typical valuation multiples

You can calculate the estimate of business market value using a number of valuation multiples – each establishing business value in relation to some measure of its financial performance. Here is our short list of the valuation multiples most commonly used to value private businesses:

• Enterprise value (EV) to gross revenues or net sales.
• EV to net income.
• EV to EBIT and EBITDA.
• EV to seller’s discretionary cash flow (SDCF or SDE).
• EV to total business assets.
• EV to owners’ equity.

Do valuation multiples vary by industry?

A key question: just how much do the valuation multiples vary by industry sector? Let’s take a closer look at what such valuation multiples represent.

Business value is about risk and returns. Hence, to measure what a company is worth, you need to estimate both its earning ability and assess its risk. The standard way to evaluate business risk is to calculate the so-called discount and capitalization rates. There are a number of well-known income-based valuation methods that you can then use to appraise a business.

Market valuation multiples are related to this concept. This is especially clear when these multiples are applied to business earnings such as EBITDA or net income. In fact, these valuation multiples act pretty much as the inverse of the company’s capitalization rate – instead of dividing the business earnings by the cap rate, you multiply it by the valuation multiple. The result is the estimate of what your business is worth.

Industry risk premium and valuation multiples

If you take a close look at the Build-Up cost of capital model used to calculate the discount and cap rates for your business, you will see that one key component is the industry risk premium. This additional part of business risk depends, as the name implies, on the industry sector the company operates in.

Businesses in high risk industries are less valuable

The higher the industry risk premium, the lower the valuation multiple. This means that, for a given earnings forecast, the business value is lower. Put another way, the businesses in an industry with high risk premia are more risky and, therefore, worth less.

Valuation multiples by industry – some examples

Just how much do valuation multiples vary by industry? We’ll use the typical Price to EBITDA multiples for several industry sectors to demonstrate the difference: