Market-based business valuation techniques are often used to value professional architecture firms, classified under SIC code 8712 and NAICS 541330. Many business sales in this professional services industry are brokered by skilled business broker intermediaries. As a result, there are reliable business sale comparables data to value your architectural services company.

While you have a number of valuation multiples for business value calculation, some are more accurate than others when it comes to valuing the architecture firms.

Top valuation multiples for architecture firm appraisals

Our ranking of valuation multiples is based on the coefficient of variation that indicates the spread of business valuation multiples around the average. The smaller the coefficient, the smaller the spread of business value estimates you get.

Here is our list of valuation multiples arranged in the order of their accuracy:

  1. Business selling price to gross revenues or net sales.
  2. Business enterprise value (EV) to EBITDA.
  3. Business sale price to EBIT.
  4. Business sale price to Net Income.
  5. Business sale price to total business assets.
  6. Price to the book value of equity.

The first valuation multiple is the typical one used for pricing an architectural company for sale.

Market players tend to value architecture firms based on EBITDA and net sales

The coefficient of variation for the net sales-based valuation multiple is just under 0.5 which is 2.5 times less than the equity-based number. What this means is that most architecture firm sales are actually priced using the company net sales or EBITDA as the valuation basis.

Setting the right asking price for your business can make a big difference to the successful sale outcome and the time it takes to sell the company. While the average days on market is around 470 days, it can take over 2 years to sell an architecture firm.

Example – business valuation of an architecture firm using the multiples

Let’s consider a typical firm grossing around $600,000 in net sales and generating $200,000 in EBITDA profits in the most recent year.

Using the typical valuation multiples of 0.5 times the net sales and 2 times the EBITDA, gives us the following estimates of business value for the firm:

  • Business value based on net sales: $300,000.
  • Business value based on EBITDA:    $400,000.

One way to reconcile the difference is to average the two results above. Applying the weights based on the accuracy of each value estimate, we get:

$300,000 x 0.52 + $400,000 x 0.48 =  $348,414

The business value estimate covers the tangible assets, goodwill and other valuable intangibles such as client lists. Cash, receivables and company owned real estate are usually not included.

More on valuation multiples for architecture firms

Recent sales of architecture firms are an excellent source of valuation multiples. You can estimate your firm’s fair market value based on its gross revenues, net sales, profits, EBITDA, cash flow and assets.

8 Comments

dan says:

I am looking at a company with an EBITDA of $400k and annual growth of 8-12%. In today’s market, what is the multiple for this company — I am suggesting 3.5x. Let me know your thoughts.

Harry says:

Dan,

Without knowing more about the firm, I would suggest the EBITDA multiples in the 2 – 3 times range. Firms with exceptional earnings stability have sold for over 6 times the EBITDA. However, it is unlikely that the current market would support such valuations.

Nik says:

How do newly awarded contracts affect the valuation of the business?

Business currently nets $200K/annually but has a one contract extension at $500K and a new awarded contract at $750K. Both over the next three years.

Harry says:

Such contracts will affect the future cash flows of the firm. You can capture this in your earnings projections, say over the next five years.

Then use the Discounted Cash Flow method to determine the business value.

To check the effect of the contracts on the firm’s value, repeat the valuation, this time assuming the new contracts do not exist.

Compare the two valuation results to see the difference.

Tim says:

I am a sole proprietor with, over the last 10 years, an average revenue around $200k. I also have a backlog of work of over $150k. How would I determine the value of my firm for sale to larger firm?

Harry says:

I would suggest performing a business valuation of your company to see what it is worth. Since you plan to sell the business to a larger acquirer, using the market based valuation methods is very useful. You can see an example of such valuation on our website:

Market based valuation example

In addition, it would be useful to compare your results against the well known income based valuation methods:

Discounted cash flow method

This valuation approach focuses on the ability of your company to generate earnings, given its risk profile. Combining results from several valuation methods is an excellent strategy as each method adopts a different view of business value.

You can see how a number of valuation methods are used to conclude what a business is worth in our sample appraisal report here:

Sample business valuation report created by the Report Builder tool

David Bockian says:

I am a partner in a Design/Build Arch. firm that is an S Corp, and throws off a dividend of $700,000 pretty regularly. The growth has been ~7.5% for the past 15 years. We have between 25% – 50% of our revenue from one construction firm, that desires to purchase our firm. I valued the company at between $2.5 – $2.8mm due to the history of the dividend. Am I out of whack?

Harry says:

Not necessarily. But the devil is in the details.

First, dividends are not the appropriate earnings basis for business valuation of architectural firms. Rather, a measure of cash flows, such as the net cash flow or seller’s discretionary earnings, is used in professional appraisals.

You have a respectable earnings growth, but a major business risk in your customer concentration relying on a single client for up to half of your revenue. If you look at the standard multiple of discretionary earnings business valuation method, you will notice that high levels of customer concentration are a risk factor which reduces the value of your firm, other things being equal.

You would also do well to consider running a proper business valuation with a number of methods. For an example of how to do it, take a look at our sample business valuation report, showing your how all three standard business valuation approaches are used to really get to the bottom of what a business is worth.

Doing this should help you reveal the true market value of the firm and help in negotiating the best deal with your business buyer.

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