If you are wondering how the current economic downturn is affecting the restaurant values, there is no better way to find out than by studying the recent business sales. The food and drink industry, classified under the SIC code 5812, is huge and restaurants sell quite often.

Typical valuation multiples for restaurants

Restaurants for sale are most often priced using these valuation multiples:

• Business sale price to gross annual revenues.
• Business sale price to seller’s discretionary cash flow.

Asset based valuation multiples are rarely used in valuing a restaurant. The seller’s discretionary cash flow is the most common measure of owners’ benefit when valuing private restaurant businesses.

Restaurant values and recent valuation trends

We study restaurant selling prices very closely. Here are some interesting trends that have emerged recently:

• In 2008 the restaurant sales have generally been priced based on the seller’s discretionary cash flow.
• The business price to discretionary cash flow valuation multiples are down about 20% in 2008 compared to a year ago.

What are the business buyers doing? They value a restaurant based on its ability to generate cash flow rather than revenues. And they price in the additional risk right into their valuation multiples. The implications?

• Profitable restaurants still sell.
• Those that do sell tend to command lower prices as buyers factor in the earnings risk into their business valuations.

Example – effect of the valuation multiples decline on restaurant business values

To put things in perspective, let’s say that a restaurant generates $1,000,000 in annual gross sales and throws off $250,000 in discretionary cash flow.

A likely selling price for this business in 2007 would have been around $500,000. By the end of 2008, the same restaurant would be worth $400,000 – a $100,000 drop in business value in just 12 months!

Valuing a Restaurant based on Market Comps

If there is one measure of financial performance that stands out in the retail industry it is sales per square foot or SPF for short. Retail stores are often benchmarked using SPF – and there are good reasons for doing this:

• Floor space is expensive. Successful retailers utilize it to maximize their revenues. For each business concept there is a sweet spot square footage that works best.
• Rent is a major operating expense for retailers. Rents in excess of 10% of gross revenue are a red flag.
• A retail shop with oversized floor space has to contend with high rental expenses and extra product costs to fill in the space.
• It takes more labor to service a larger than needed floor space. This erodes the retail business profit margins.

Top valuation multiples for a retail business

Here is the short list:

1. Business sale price to annual revenues, plus inventory.
2. Business sale price to discretionary cash flow. Inventory is extra.

Given the importance of maximizing the sales per square foot, you would expect that the value of a retail business depends on its revenues. This is indeed the case – the most commonly used industry valuation multiple for a retail business is the business sale price to annual revenues.

If returns and discounts are significant in your business, consider using the business sale price to net sales valuation multiple.

The close second valuation multiple for private retail stores is business sale price to seller’s discretionary cash flow.

The advantage of using this second multiple to value your retail business is that it measures your business worth directly on the amount of cash flow the business throws off.

A word of caution: do not confuse discretionary cash flow with business net profits. The discretionary cash flow is what the business puts in its owners’ pockets – which typically is quite different from the taxable business income.

A major mistake in retail business valuations is applying the cash flow based valuation multiple to business net income or EBITDA. This is likely to result in your business being undervalued significantly!

With all the cost of goods and operating expenses a retail shop owner needs to handle, valuing your business on cash flow makes sense.

Business Market Values across 420 Industries

Other business valuation methods for retailers

If you need to value an owner-operator managed retail business, consider using the Multiple of Discretionary Earnings method.

This well-known method considers both the business cash flow and a number of critical financial and operational performance factors.

If your retail business is an established institution in its market, then you probably have built up considerable business goodwill.

Capitalized Excess Earnings valuation method, described in the Internal Revenue Service Ruling 59-60, is a recognized way to calculate your business goodwill and total business value.

Valuing a Retail Business Three Ways

Do you own a small engineering firm or are looking to acquire a consulting company? Here are some interesting industry statistics and company valuation tips that you may find useful:

Private engineering firms are a typical small professional service business. Of some 94,000 engineering firms classified under SIC code 8711 in the US, fewer than 8% have more than 25 employees.

While the engineering consulting industry as a whole generates over $185B in annual revenues, the average engineering company does about $2.2M in gross revenues annually and employs a staff of 11.

Privately owned engineering companies cover a number of disciplines, the most common being:

• Civil and structural engineers
• Mechanical engineering and industrial automation
• Electrical engineers
• Environmental and chemical engineering consultants
• Information technology services and systems engineering

The market for engineering service businesses remains highly fragmented with the top 4 consulting firms accounting for about 15% of the industry revenue. Most engineering companies are locally owned and operated and address the needs of specific market niches in their target geographies.

Professional engineering license requirements tend to limit competition and contribute to relatively consistent billing rates and stable business earnings across the industry.

Valuation multiples for engineering companies

Smaller firms with gross annual sales under $10,000,000 are typically valued on their earnings, most often seller’s discretionary cash flow. Business sale price to gross revenues is the second most common formula multiple used in valuing an engineering company.

To determine the fair market value of larger engineering companies, the following valuation multiples are typical:

• Business sale price to net sales
• Business sale price to gross profit
• Business sale price to discretionary earnings
• Business sale price to EBITDA

Engineering company value – cash is king

Interestingly, the historic coefficient of variation for the business price to EBITDA valuation multiple is almost 4 times greater than the discretionary earnings based figures.

Why is this important? The smaller coefficient of variation tells us that the valuation multiples based on discretionary cash flow tend to cluster around the mean. You can estimate your engineering company’s fair market value with greater precision if you use such valuation multiples.

This points to the need to adjust your engineering company financial statements in order to establish the business earning power – typically based on the discretionary cash flow, not the accounting profit multiples.

Other business valuation methods for engineering firms

Depending upon your business valuation needs, you can resort to a number of standard business appraisal methods. For established engineering companies the value of business goodwill may be considerable. The Capitalized Excess Earnings business valuation method is an excellent choice for valuing such companies.

Equally important, you will need to separate the overall goodwill into the personal and business goodwill parts. While the personal goodwill is generated by the skilled employees, the business goodwill belongs to the company itself, and is highly transferrable in case the business sells.

The Discounted Cash Flow business valuation method is the usual choice when valuing a young or rapidly growing engineering firm. This method is widely used by the venture capital industry and requires no introduction when talking to business appraisal professionals.

If you require a precise, defensible business valuation of your company, the discounted cash flow valuation should be on your list of priorities.

If you are valuing a smaller owner-operator managed engineering firm, consider using the Multiple of Discretionary Earninings method. The method offers a very intuitive link between the business earnings, key financial and operational performance factors and business value.

Engineering Company Valuation

If you think small domestic call centers are a thing of the past  and have been outsourced offshore, think again – there are over 15,000 small and mid-size call center businesses operating in the US alone, classified under SIC 7389 and NAICS 561421.

While the average call center employs nearly 300 agents, many businesses in this industry have fewer than 20 employees. The average annual revenues for private call center companies top $11,000,000. However, many small home-based call centers are much smaller – generating around $400,000 in annual billings.

Key value drivers for call center businesses

When it comes to valuing a privately owned call center, size makes a big difference. Indeed, larger firms with annual billings of $10,000,000 or more command valuation multiples that are more than twice those for small call centers whose revenues are in the sub-$1,000,000 range.

Call centers tend to be quite labor intensive and rely upon customer service rep recruitment and training. Businesses that have their direct labor costs under control tend to get higher valuations. Above average call centers keep their direct labor costs to within 50 – 51% or revenues.

Business valuation methods for valuing call center companies

You can choose a number of well-known business valuation methods to value a call center. However, as with many business services, call center valuations are often done using a combination of the market and income based business valuation techniques.

Call center valuation multiples

Private call center sales that took place recently offer you an excellent indication of what such businesses are worth. The best valuation multiples are those that give you the most accurate estimate of what a similar business is likely to sell for. Here is our list:

• Business sale price to EBITDA.
• Business sale price to annual gross revenues.

The spread between the low and high selling prices for the EBITDA based business value estimates is about 60% that of the revenue-based figures. We take this as an indication that business buyers and sellers tend to use EBITDA more often when pricing the “real-world” call center business sale deals.

Put another way, the buyers value business profitability above the revenue or business assets in this industry.

Valuing a day care center business based on its income

No call center valuation is complete without the use of at least one of the income-based business valuation methods. For larger call center companies the Discounted Cash Flow method is the usual choice.

You can determine the value of a small owner-operator managed call center as a multiple of its earnings, using the Multiple of Discretionary Earnings valuation method.

Business goodwill valuation for existing call center companies

Call centers that have been around and established a track record of success can command a substantial premium on the market due to their goodwill. To calculate what the business goodwill is worth you can use the well-known Capitalized Excess Earnings method.

As the name implies, this valuation technique lets you calculate the value of business goodwill by capitalizing a part of the business earnings. The idea behind this business valuation method is that superior earnings translate into higher business value.

Key industry stats

Classified under SIC 8351, there are slightly under 149,000 day care centers operating in the US alone. The industry as a whole generates over $19.9B in annual revenues.

Despite the growing presence of large chains, the average day care center is small – producing some $100,000 in annual sales with about 7 employees. These businesses are labor intensive – to produce some $3,000,000 in annual revenues, a typical day care center employs 50 – 100 staffers.

Day care centers employing fewer than 25 staff are responsible for $9.7B in revenues – over 49% of the industry total. While the industry is quite fragmented, the entry costs tend to be high due to considerable investments in the facilities required.

Top 7 factors affecting the value of daycare businesses

Day care centers which command the highest valuations tend to exhibit the following traits:

1. Size makes a difference. The most valuable day care centers have a licensed capacity of over 100.
2. Attractive location – both the interior and grounds.
3. Rent expense within 10% of business gross revenues.
4. Long-term, skilled staff.
5. High levels of historic and current enrollment.
6. Percentage of business revenues covered by state subsidies.
7. Relatively high proportion of educational programs offered.

Business valuation methods for day care centers

As with any small business, you can determine the value of a daycare center using a number of business valuation methods.

Valuation multiples

Day care centers are frequent business acquisition targets. You can use existing business sale comps to get a good idea of what a day care center is worth. The most commonly used valuation multiples, or ratios that relate the business’s value to its financial performance, are:

1. Business sale price to gross revenues plus inventory.
2. Business sale price to seller’s discretionary cash flow plus inventory.
3. Business sale price to EBITDA. Inventory is added separately.

The valuation multiples based on the business gross revenues offer you the most accurate estimates of business value in this industry. We study the differences between the different multiples to determine the pricing trends for businesses over time.

What our analysis shows is that for privately owned day care centers using the gross annual revenue as the basis, you get the business value estimates with the least spread between the low and high values. In contrast, the business value estimates based on the discretionary cash flow show spreads almost twice as large.

Since these valuation multiples are derived from actual business sales, this means that business buyers and sellers tend to rely on the business price to gross revenue valuation multiples when pricing day care center business sales.

Valuation multiples, business sale price and terms

As a rule, valuation multiples do not account for the way a business sale is financed. That is one reason there is a spread between the low and high values. Seller financed deals tend to price higher than all-cash business sales.

An average day center business purchase includes seller financing for about 30% of the contract purchase price. Typical seller notes have a term of 5 – 7 years with an average of 8% annual interest, fully amortized. You can expect a business sale price that is 20 – 25% higher with such financing compared to an all-cash transaction.

Valuing a day care center business based on its income

Small day care centers are typically owner-operator managed. A well-run business in this industry tends to have rather steady income levels. For such businesses, the Multiple of Discretionary Earnings business valuation method is a great choice.

You can calculate what your business is worth based on its earnings and a set of key financial and operational performance factors. In addition to calculating the current business value, you can use this well-known method to plan a number of changes that can increase your business worth.

Business goodwill valuation for established day care centers

Well-established day care centers develop considerable business goodwill. You can calculate the value of business goodwill using the Capitalized Excess Earnings method.

This is very useful if you plan to buy or sell a day care center and need to allocate the business purchase price among its assets in a tax-advantaged way.

For a mature industry, commercial printing shows surprisingly low consolidation. There are, for example, some 31,750 lithographic printing establishments in the US alone. This printing industry segment generates an impressive $45B in annual sales and employs nearly 345,000.

Yet an average commercial printer is a small business – making $1,500,000 in annual revenues and employing 11 staff. Commercial lithographic printers with fewer than 25 employees account for 92% of the total businesses in their segment and generate over $16B in sales. Small owner-operator managed printing shops thrive alongside the much larger competitors!

What makes a commercial printing business worth more

No two printing businesses are the same. For a small printing operator, finding a profitable, defensible niche is very important. A number of factors can make your business worth more:

• Business size. Larger commercial printers tend to be more valuable.
• Profitability. Valuable printing companies tend to have operating profits topping 10 – 15%.
• Industry segment. Lithographic printing businesses are the largest segment with good growth prospects. Another valuable industry segment is digital printing.
• Low customer concentration. To maximize your business value, your top 5 customers should not exceed 10% of total revenues.

What valuation multiples are used to value printing businesses

Established commercial printers are frequent business acquisition targets. You can use the selling prices of similar printing businesses to come up with a number of valuation multiples to estimate your business fair market value.

Our analysis of the private printing business sales shows that the following valuation multiples provide the most accurate business value estimates in this industry:

1. Business selling price to gross sales plus inventory.
2. Business selling price to seller’s discretionary cash flow plus inventory.
3. Selling price to annual EBITDA. Again inventory is extra.

The EBITDA based valuation multiples tend to give you the business value estimate with a higher spread between the low and high values. One reason for this is that the available cash flow in a commercial printing company is affected by the capital expenditures, such as new equipment purchases. While EBITDA includes the depreciation charge, it does not account for the annual ”capex” outlay directly.

Generally, the higher your business EBITDA and the lower the capital expenses, the higher the EBITDA based multiple. This is especially true for commercial printers grossing over $2M in revenues.

Valuing a Business: Market Comps

Other business valuation methods for commercial printing businesses

As with other small businesses, commercial printers can be valued using a number of income and asset based business valuation methods. For owner-operator managed printers, the Multiple of Discretionary Earnings method is a frequent choice. This well-known method lets you determine the value of your business based on its earnings and a set of financial and operational performance factors.

For a well-established commercial printing business, the Capitalized Excess Earnings method is a good choice. You can calculate the value of your business and its goodwill – an important part of what makes a successful business worth more.

If you are looking to sell to a larger competitor, a group of investors, or need a very accurate, defensible business appraisal, consider using the Discounted Cash Flow method. You can determine what your business is worth directly from its earnings forecast and risk assessment.

Retail bakery industry – top statistics

The bakery industry has deep roots in the economy with a number of established players. In the US alone, there are some 9,600 bakeries classified under SIC 5149 that generate just under $28B in annual revenues.

While the market is dominated by a few big competitors with the top 5 responsible for almost 50% of the total sales volume; some 7,000 small, privately owned bakeries compete successfully.

Large bakeries may employ over 100 employees and do some $50M in business each year. Yet a typical retail baker is a small business with just one location, an average staff of 11, and $5,500,000 in annual revenues.

Business value drivers for a retail bakery

To be successful and increase their business value, bakery owners pay special attention to a number of key factors:

• Equipment. Good automation helps reduce direct costs including labor. However, new equipment can be very expensive, which deters new competitors.
• Labor costs. Bakers often work during early hours. This tends to increase labor costs due to small available labor pool and higher health insurance costs.
• Product differentiation. A growing trend is toward production of specialty baked goods such as artisan breads, and products for the health conscious consumer. Small bakers can excel in this market place which tends to be less price sensitive.
• Cost-effective materials procurement. Successful bakers manage their material costs to within 20% of gross sales.
• Effective distribution. Making your products available on time through the right outlets to the target market is essential for success.

Valuation multiples that work best for valuing a bakery business

Many small bakeries are family owned with business ownership passing from one generation to the next. Nevertheless, bakeries do sell so there are business sale comparables you can use to estimate the market value of these businesses.

Typical valuation multiples used to assess the value of a small bakery are these:

1. Business selling price to gross revenues plus inventory.
2. Business selling price to seller’s discretionary cash flow. Again, the inventory is extra.

To come up with the most accurate estimate of business value possible, you may consider using a number of valuation multiples based on business revenues, gross and net profits, EBITDA, cash flow and assets values.

Business Market Values across 420 Industries

Valuation multiples with the smallest spread offer reliable business value estimates

While you can use any number of valuation multiples to estimate the potential business selling price or market value, the best estimates come from the valuation multiples that tend to “cluster” around the average value.

What this means is that business owners and buyers in your industry rely on these valuation multiples more often when pricing a deal. Since the market is seen by many as the ultimate arbiter of business value, you should pay attention to these valuation multiples when calculating your business worth.

Other business valuation methods for bakery appraisal

For family owned and run bakery businesses, the Multiple of Discretionary Cash Flow method is the most common way to assess business value. The power of this income-based business valuation method is in its ability to account for a number of key financial and operational business performance factors that affect directly what the business is  worth.

Business Valuation: Multiple of Earnings

For larger, multi-site bakeries, the Discounted Cash Flow business valuation method is the preferred choice. This well known method lets you treat bakery valuation as an investment project, factoring in the business earnings and risk in your calculations.

Valuing a Business: Cash Flow and Risk

To get an accurate, defensible bakery appraisal, your business valuation model should include a number of different methods.

Given the current situation in the real estate market, there is an uptick in real estate agency valuations. Many brokerage owners want to know what the agency is worth should they decide to put the business up for sale.

When it comes to valuing a business in this industry, real estate brokerages are quite similar to professional practices:

• Hard asset base is relatively low.
• Revenue generation depends upon the skill of professional real estate agents.
• Business goodwill, especially for established agencies, is very important. At least a part of business goodwill is personal in nature, which may complicate its transfer to the new business ownership.
• Licensing requirements create a barrier to entry, reducing the available pool of business buyers.

Business valation approaches and methods

A real estate brokerage can be valued under all three standard approaches to business valuation:

1. Market – based on comparison to similar real estate business sales.
2. Income – factoring in the real estate agency earnings prospects and risk.
3. Asset – by accounting for the values of the real estate agency assets and liabilities.

Asset-based business valuation methods are less common in valuing a real estate agency. The hard assets are typically concentrated in the office furniture and fixtures, computer equipment and productivity software tools. Their market values can be easily determined. However, valuing the business intangible assets, such as client lists, is far more difficult.

One asset-based business valuation  method that is useful for valuing a real estate brokerage is Capitalized Excess Earnings. This well-established business appraisal technique lets you calculate the value of business goodwill based on the so-called excess earnings – those over and above a fair return on the business tangible assets.

Business valuation using market comps

Market data on real estate agency sales is a frequent source of comparables. Just as in the real estate sales, market comps offer a way to estimate the fair market value of a real estate brokerage.

Typical business valuation multiples for real estate agencies

The most reliable valuation multiples are:

• Business sale price to gross revenues.
• Business sale price to seller’s discretionary cash flow.

Valuation Multiples and Business Market Values

At ValuAdder, we analyze recent private business sales in all types of industries. To offer you an accurate business market value estimate, we calculate over 40 valuation multiples – relating the business selling price to its revenues, profits, EBITDA, EBIT, cash flow, and assets, among other measures.

This statistical analysis shows that accuracy of business valuation multiples varies by:

1. Industry.
2. Company size.
3. Over time.
4. Selected measure of business financial performance.

The best valuation multiples tend to give you business sale price estimates with low variation that tend to cluster tightly around the average.

This basically means that business buyers and sellers rely on these valuation multiples when pricing a business for sale in your industry.

Valuation of real estate agencies on income

Business values of established and young real estate agencies are very often determined using the income-based business appraisal methods.

For mid-market real estate brokerages, the discounted cash flow is the preferred valuation method. For smaller, owner-operator managed agencies, the multiple of discretionary earnings method offers a great way to directly capitalize the business value.

Business selling price and market value

Your business valuation number does not necessarily equate to the business selling price. When offering a real estate business for sale, both price and terms affect the “cash value” of the deal.

Just as with other types of professional practices, an earnout is a frequent element of the deal. This makes part of the contract business selling price contingent upon its future financial performance, such as achievement of a certain level of sales.

Privately owned specialty coffee shops are ubiquitous and their number is constantly growing.

In the US alone, there are some 19,000 privately operated coffee shops. They generate over $11.1B in total annual sales. Yet an average coffee shop is definitely small business – with annual revenues of $1,500,000 and a staff of just 9 people.

Coffee shops can be very profitable, recession proof businesses. A well-run business focuses on its local target market, satisfies the tastes and offers the unique atmosphere to develop a loyal customer following.

Successful franchises have come forward by capitalizing on the “affordable luxury” appeal of specialty coffee drinks and the ambiance that draws the customers in.

Business value drivers for coffee shops

While starting a coffee shop is relatively easy, running a successful business is more challenging. Here are the top factors that affect what your business is worth:

1. Location. Coffee shops are gathering places, so the best location is where your target customers like to get together.
2. Quality and variety of coffee drinks offered.
3. Cost of goods including the wholesale coffee costs.
4. Competitive differentiation, such as additional on-premises food and beverage offerings, retail coffee and tea sales.

Business valuation techniques for coffee shops

Coffee shops sell quite often, so you can estimate your business market value using valuation multiples based on private coffee shop sales. The most accurate valuation  multiples are:

• Business selling price based on its revenue plus inventory.
• Business selling price based on the annual discretionary cash flow plus inventory.

Valuation Multiples and Business Selling Prices

Many small coffee shops are owner-operator managed. For such an operation, the Multiple of Discretionary Earnings business valuation method is a great choice.

You can determine what your coffee shop is worth based on its earnings and a number of key financial and operational performance factors. What’s more, you can also see how these factors affect your business value – and what you can do to increase your business worth.

Heating, ventilation and air conditioning as well as plumbing contractors make up a very large industry with over $121 billion in annual gross revenues.

The industry is still highly fragmented with some 178,550 independent business competing across the US alone.

The average business in this industry, classified under SIC 1711, is privately owned and small – with $700,000 in annual revenues on average, employing 6 full time equivalent staff.

Factors that drive company valuations

Successful HVAC and plumbing contractors tend to focus on the service they provide to their target market. Differentiation is key to profitability and business owners must make key decisions on what service mix to offer to their commercial or residential clients.

Location of the busines premises is not as critical as say, for retail stores, because HVAC and plumbing contractors travel to their customer sites. However, local offline and online advertising visibility is very important for new business, as are referrals from your existing customers.

HVAC and plumbing contractors need to generate steady repeat business to smooth out income fluctuations. Ongoing service and maintenance contracts can be extremely useful for sustainable profitability.

Being flexible and in tune with emerging market trends is the hallmark of successful contractor businesses in this industry. Your profits, and company value, depend strongly on how well the service mix fits in with the current market needs.

Business valuation methods for HVAC and plumbing contractors

HVAC and plumbing contractors sell often, so there are private business sale comps you can use to come up with accurate valuation multiples in this industry.

The typical valuation multiples for these companies are:

1. Price to annual revenue, plus inventory.
2. Price to SDCF, plus inventory.

Valuation Multiples by Industry

Why these valuation multiples?

We continuously analyze the private business sale comps in many industries. To select the best valuation multiples for a business, we look at the business selling price spread, low to high, in comparison to the average selling prices. In math terms, we look for the valuation multiple with the lowest coefficient of variation.

You can estimate your business selling price more accurately using the valuation multiples that show the relatively low variation around the average selling price.

Because most business buyers and sellers use them

What this means is that business buyers and sellers in your industry tend to rely on these valuation multiples more often to price their deals.

To get reliable estimates of business market value

Using such valuation multiples, you can come up with an accurate estimate of what your business is worth on the market.

Business valuation based on income and risk

For business appraisals of owner-operator managed businesses, you can use the Multiple of Discretionary Earnings business valuation method.

The method lets you calculate what your business is worth based on its earnings and 14 important financial and performance factors.

What is your business goodwill worth?

For well-established HVAC and plumbing contractors that have been around for a number of years, the question of business goodwill is important.

You can use the well-known Capitalized Excess Earnings business valuation method to determine the value of business goodwill – an important part of the total business value.