If you are buying a business or selling your business, estimating the business selling price by market comparison is a good idea. Recent business sales in your industry offer an excellent way to develop your asking price or check your offer price and terms.
A number of business pricing multiples to choose from
As we discussed in the Business Valuation using Market Comps post, you have a number of valuation or pricing multiples to do your comparisons. Which ones work best?
How to pick your pricing multiples
The answer depends on your business valuation situation. Your choice of the valuation multiples needs to address these important questions:
- Which pricing multiples give the most accurate prediction of business market value?
- Which valuation multiple gives the best estimate of what my business is worth?
In the market, business selling prices are set by the business sellers and buyers. So what do these players use as their basis to determine the business value?
Valuation formula multiples are developed by statistical analysis of the actual business sales. Let’s say that in your industry the Price to Gross Revenue valuation multiples cluster around the average value. In other words, business values determined using such pricing multiples fall within a narrow range.
This means that your business peers tend to rely on the business gross revenues to determine the business selling price. Knowing this, you can use the Price to Gross Revenue valuation multiple to get a good idea of what your business is worth.
Obviously, such pricing trends can differ by industry. ValuAdder market-based Valuation Formulas use advanced technology to help you make the most accurate choice of the valuation multiple for your business.
Business valuation multiples – making strategic choices
You can use a number of other business valuation multiples as a strategic choice to demonstrate your business value.
For example, the business may be exceptionally profitable compared to its industry peers. In such a case, you may decide to use the Price to Net Income or EBITDA valuation multiples which will show how profitability translates into superior business market value.
If the business is asset rich, business Price to Tangible Assets or Total Asset base may be a good choice of a pricing multiple.
Alternatively, you can pick the Price to Gross Profit valuation multiples. This may be a good fit if the business shows outstanding operational efficiencies which keep its direct costs low compared to the competition.
Take a peek at ValuAdder Business Valuation Market Comps Tool to see how a number of business valuation multiples can be used to estimate your business market value.