Archive for the 'Valuation in Your Industry' Category

Thinking of valuing a company in the telecommunications industry? Consider some key industry stats:

This large and highly diverse industry sector is classified under the NAICS code 517. In the USA there are some 50,600 telecom companies competing across a broad spectrum of product and service offerings. The industry as a whole generates a hefty $545.5 billion in annual revenues. The industry sector total employment is around 1,134,500 with a revenue per employee of $481,000 per year. The average telecom business does about $10.7 million in business annually and employs a staff of some 22 including technical professionals and administrative staffers.

Over 28,000 of companies in the telecom industry have 1 to 4 employees on their payroll. Of the total of over 50,600 firms less than 5,600 have more than 50 employees.

Where are the telecom businesses found? In the US, the highest density of companies in this industry sector is in California, New York – New Jersey, Texas, Florida, Washington DC, and West Virginia. Of course, just about every geography has a number of successful telecom firms providing a broad range of services to customers around the world.

Business valuation of telecom companies

Telecom industry is very competitive and successful businesses are highly sought after as acquisition targets. Selling prices of such companies are used as an indicator of market values for similar businesses.

You can compare a target telecom company to its sold peers by calculating the ratios of business selling prices to a number of financial performance metrics. The ratios of selling prices to financial performance figures are known as valuation multiples. The multiples so derived help you develop an idea of what a given telecom company is worth in the market place.

One of the most useful valuation multiples is business enterprise value to its gross annual revenue.

Business valuation of a telecom company – an Example

To show you how this works, let’s pick a middle of the road telecom business with an annual gross revenue of $10 million and inventory of $1 million. Next, we choose a set of reasonable valuation multiples and crunch the numbers. Here are the results:

Multiple Multiple value Business value ($’000)
Low 0.46 $5,608
High 1.18 $12,767
Average 0.66 $7,599
Median 0.62 $7,195
Average Business Value $8,292

Note that we have added the value of inventory to the result of multiplication. This is common when valuing businesses with widely varying inventory levels.

Telecom Company Valuation

Recently observed business selling prices give you the real world data on which to base your own valuation. There is nothing more credible than the prices paid for similar businesses. You can calculate a number of other valuation multiples such as those based on net profit, EBITDA, or business assets.

See Example

If you are considering a dental practice appraisal, here are some interesting industry statistics:

There are over 133,000 privately owned dental practices in the US alone, classified under the SIC 8021 and NAICS 6212. Dental practices are a large part of health services and generate around $104B in annual revenues growing annually at 11.6%. 

Yet an average dental practice is a small service business – employing a staff of 6 – 7 and producing some $787,000 in annual sales. Revenue per employee is about $119,000. Dental practices employ some 882,700 staff.

Dental practice valuation methods – comparable practice sales

Practice sales happen regularly so there are plenty of comparable data to use for valuing a dental practice. There are a number of valuation multiples to choose from, each giving you a different way to determine the practice value. Here are the top ones most often used to price a dental practice for sale:

Surprised by this list? Well, the traditional way to assess a dental practice value has relied upon the net sales or gross annual revenues. However, the market for dental practices is quite dynamic and pricing trends change over time.

We keep an eye on the spread of actual practice selling prices from the average. This is handily captured by the coefficient of variation – the smaller this number the tighter the selling prices cluster around the mean. If you want to estimate your practice value, use the valuation multiples with the smallest coefficient of variation first. This means that practice buyers out in the market rely on these multiples more often when pricing acquisitions.

Recent dental practice sales data show that the gross profit based valuation multiples can give you the most accurate estimate of current practice value. In fact, its coefficient of variation is just 0.39 compared to 2.39 for the net sales based multiple.

Example: How to price a dental practice using multiples

Consider an average private dental practice generating $300,000 in annual net sales, having a gross profit of $275,000; discretionary cash flow of $100,000; and market value of all invested capital, which includes the practice assets and long-term liabilities, of $85,000.

Let’s take reasonable values of the respective valuation multiples for use in our value calculations:

  • Sale price to gross profit: 0.7.
  • Sale price to total invested capital: 2.
  • Sale price to net sales: 0.6.
  • Sale price to discretionary cash flow: 1.7.

Applying these valuation multiples gives us the following practice value estimates:

  • Based on gross profit: $192,500.
  • Based on total invested capital: $170,000.
  • Based on net sales: $180,000.
  • Based on discretionary cash flow: $170,000.

This gives us the average practice value of $178,125.

By convention of professional practice appraisals, the value includes all tangible assets and practice goodwill. It does not include cash, accounts receivable, liabilities or real estate. The value of earnouts set aside as a contingent part of the selling price, if present, is also excluded.

Dental Practice Valuation Multiples

Recent sales of private dental practices are an excellent source for estimating your practice value. See how to value a dental practice based on its gross revenues, net sales, profits, EBITDA, cash flow and assets.

See Example »

Other methods for dental practice valuation

As in other health care practice valuations, the value of a dental practice is driven by its earning capacity. You can use a number of income based valuation methods to determine what your practice is worth. Both Multiple of Discretionary Earnings and Discounted Cash Flow methods are frequent choices in dental practice appraisals.

For an established practice, consider using the Capitalized Excess Earnings method that lets you estimate the value of practice goodwill. This may well make up a large part of the overall practice value.

Before starting with your food distributor valuation, consider these industry statistics:

In the US there are currently over 2,600 such businesses classified under SIC code 5149 and NAICS 42441. Food wholesalers generate a combined annual revenue of $160B. The industry employs over 132,000 people. The average food products distributor makes over $61M in sales with a staff of 50. Sales per employee average about $1,200,000.

Business valuation for food distributors

Successful privately owned food distributors are desirable acquisition targets for both their competitors and professional investment groups. The selling prices of similar businesses are an excellent source of comparable data you can use when valuing your own company.

To make such a comparison work, calculate the ratios of business selling prices to the firm’s financial metrics. The result is what is known as valuation multiples. You can use the multiples to come up with an estimate of your business market value.

The typical valuation multiple for this wholesale industry sector is based on the business yearly gross revenues or net sales.

Example: Food distributor business valuation based on its revenue

To illustrate the idea, let’s take a typical food products wholesaler with an annual gross revenue of $50M and inventory of $25M. Choosing a set of valuation multiples gives us the following valuation results:

Multiple Multiple value Business value ($’000)
Low 0.17 $33,365
High 1.38 $94,005
Average 0.46 $48,070
Median 0.34 $42,135
Average Business Value $54,394

The value of inventory is added on top of the business value determined using the valuation multiples. This is quite typical for wholesale companies. One reason for valuing a company in this way is that inventories in wholesale industries vary over time as owners adjust the volume of products available.

Food Distributor Valuation

Current food distribution business sale prices help you determine the value of any other distributor operation. You can refine your results by running the calculations using other financial figures such as net or gross profits, EBIT or EBITDA, cash flow, owners equity and assets.

See Example »

If you take a look at ValuAdder software online tour, you will notice that the Market Comps tool covers 425 industry sectors. That means that ValuAdder has comparative business sales data across all these sectors. They cover all major industries including:

  • Business and personal services
  • Retail
  • Wholesale and distribution
  • Food and drink industry
  • Automotive
  • Manufacturing and technology companies
  • Financial sector
  • Professional services
  • And many others

You are not limited to these 425 industry sectors when using ValuAdder to value a business. This is because ValuAdder features a number of well known methods from each of the major valuation approaches:

  • Market – based on comparison with recent business sales
  • Income – based on your company’s earning power
  • Asset – based on the firm’s assets

You can select the method you want to use by just a mouse click in ValuAdder. You can easily customize ValuAdder by choosing the methods for your valuation. Click on the Learn More button as you create a method to see how it works and how you can use it.

The income and asset valuation methods, such as the discounted cash flow or capitalized excess earnings, help you determine your business value by focusing on your company rather than doing comparisons to other firms. Asset and income methods analyze your company directly regardless of your industry sector.

This is good news in situations where comparative business sales are not enough to rely on for your business appraisal. There are industries where business sales do not take place often. Moreover, your business may be unique and hard to compare to other firms in any established sector.

In such cases you can forgo the market approach and use just the income and asset methods available to you. In your business appraisal report you may want to indicate that you do not believe that the market comparison is appropriate in your particular situation.

Remember that the choice of methods is up to you. You do not need to confine your analysis to any one of them. What is important is to select a set of methods that helps you determine you business value as accurately and convincingly as possible.

Auto body repair shops are a sizable part of the very large auto services industry. The companies address the essential need in collision repair, car exterior and interior maintenance and a host of value added services that go along with keeping your auto in top shape.

To see just how important these firms are, take a look at the industry numbers. Classified under the SIC code 7532 and NAICS 811121, there are over 157,000 such companies throughout the US. As a whole they produce $90B in annual sales. The average auto body shop is rather small with some $578,000 in annual revenues and a staff of just over 5.

From time to time auto body shops sell either to other owner-operators or as part of a larger scale consolidation in the local or regional market. When the sales of businesses occur, the actual business selling prices indicate just how valuable the companies are, at least in the current market conditions.

All you need to do to value any other auto body and collision repair business is compare it against such recent sales. To make the comparison work, you can calculate the valuation multiples that relate the business selling prices to their key financials such as revenue, profits, or assets.

Example: Valuation of an auto body shop using multiples

One common measure of business value in this auto services industry is in relation to its annual revenue. To show how this valuation works, we pick a typical company with $1,000,000 in annual sales and inventory of $250,000.

For our valuation calculations we choose these valuation multiples:

Multiple Multiple value Business value
Low 0.21 $463,200
High 0.92 $1,171,100
Average 0.37 $623,100
Median 0.31 $564,500
Average Business Value $705,475

Note that the results in the table include the addition of inventory once the valuation multiple has been applied. This is the usual way to value auto service companies. If you want to see the figures less inventory, just subtract $250,000 from the results above.

Auto Body Shop Valuation

See an example of valuing a business using valuation multiples derived from recent business sales.

See Example »

Car rental companies are ubiquitous at airports, inner cities, suburbs near auto dealerships. Temporary transportation has become so important that the industry has grown by leaps and bounds. In fact there are over 6,300 such companies in the US and their number is growing at about 28% every five years.

The industry generates combined revenues of $23.8B annually and employs almost 132,500 staff. The average privately owned auto rental business is small with annual revenues of $3.8M and 21 employees.

Car rental companies that are highly successful in their market, show profitability and above average revenues tend to attract a number of interested acquisition offers. When such companies change hands, the selling prices establish the actual market value of such businesses. Using this type of data you can come up with a good idea of what a car rental company is worth at any point in time.

Car rental company valuation

Since no two businesses are the same the idea is to use the selling prices of comparable companies and relate them to common financial performance measures. This gives you the valuation multiples that you can apply to the financial numbers of a target car rental firm to get a sense of its value.

Some of the more common ways to develop market valuations is to use these multiples:

  • Business selling price to annual revenues plus inventory.
  • Business sale price to seller’s discretionary cash flow plus inventory.
  • Sale price to net income or EBITDA.

Example: Market valuation of a car rental company

Since cash is king in business, let’s take a look at how a car rental company can be valued based on its cash flow. We pick a sample business with $4,000,000 in annual revenues, $2,500,000 in inventory and $750,000 in seller’s discretionary earnings or SDE.

Let’s pick a set of valuation multiples as follows:

Multiple Multiple value Business value
Low 1.34 $1,005,000
High 2.99 $2,242,500
Average 1.79 $1,342,500
Median 1.99 $1,492,500
Average Business Value $1,520,625

The numbers above are less business inventory. Thus the total business value will be the sum of the multiple result and inventory or $4,020,625.

Car Rental Company Valuation

Here is an example of how a company can be valued based on a market comparison with recently sold similar firms.

See Example »

If you are considering valuation of a retail shoe store, here are some interesting industry stats to bear in mind:

In the US alone there are over 28,000 shoe store businesses classified under SIC code 5661 and NAICS 44821. Together they generate a combined revenue of $26.9B annually. The industry employs 3,233,000 staff. The average independently owned shoe store is small business with sales of $944,000 and a staff of between 7 and 8.

Business valuation for shoe stores

Profitable footwear retailers with a strong presence in their market are often sought after by business buyers. If you need to determine the value of a shoe store, recent selling prices of similar businesses offer you a great comparison basis.

You can use the prices from closed business sales divided by the companies’ key financials. This gives you what is known as valuation multiples to calculate the value of any other shoe store.

The most useful valuation multiple for this retail industry sector is based on the business yearly gross revenues or net sales.

Example: Shoe store business valuation based on its revenue

Consider an average shoe store with annual gross revenue of $1,000,000 and inventory of $250,000. Let’s pick a set of valuation multiples to use in valuing this company as follows:

Multiple Multiple value Business value
Low 0.64 $894,700
High 1.93 $2,181,700
Average 1.04 $1,288,600
Median 1.08 $1,327,900
Average Business Value $1,423,225

Note that the value of inventory is added on top of the business value determined using the valuation multiples. This is a convention used in valuing retail companies. One reason for valuing a company in this way is that retail inventories tend to fluctuate with time as business people build up or deplete the stock of products offered for sale.

Shoe Store Valuation

Current shoe store business sales offer you one key way to determine the value of any shoe store operation. You can explore this further by repeating the calculations using other financial figures such as net profits, EBITDA, cash flow and assets.

See Example »

Physical therapy services are a large part of the health care industry. In fact, there are some 34,300 physical therapy clinics in the US classified under SIC 8049 and NAICS 62134. Together these businesses generate over $24.5B in annual sales. There are just over 309,000 professional therapists and staff employed in this health care sector.

The average physical therapy clinic does about $715,000 in annual receipts and employs a staff of 9.

Professionally managed physical therapy centers with strong relationships with the referring doctors are attractive acquisition targets. The typical buyers are competitive clinics or investors looking to expand their holdings in the growing health care industry.

Business value by market comparison

Selling prices of physical therapy clinics give you a strong indicator of what such a business is worth on the market. You can develop a set of valuation multiples from sold clinics for direct comparison to a physical therapy practice you want to value.

Here are the typical valuation multiples used to appraise physical therapy businesses:

  • Business sale price to annual revenues plus inventory.
  • Business sales price to SDCF
  • Sale price to EBITDA

Example: valuing a small physical therapy clinic

To see how other practice sales can shed light on your clinic value, let’s consider a typical practice with $600,000 in annual sales and inventory of $150,000.

We apply a set of valuation multiples based on revenues to calculate the clinic value as follows:

Multiple Multiple value Business value
Low 0.42 $402,060
High 0.94 $712,500
Average 0.64 $535,200
Median 0.63 $529,140
Average Business Value $544,725

While the average of all the figures above is one way to report the physical practice value, you can also consider the range of values in the above calculation. In this case, our sample clinic value would value somewhere between $402,060 and $712,500.

This range reflects the market uncertainty such as the conditions of the business sale, access to acquisition capital, and specific objectives of the buyer and seller that may well affect the ultimate business selling price.

Valuing an advertising agency? Here are some key industry statistics to consider:

There are over 14,300 such businesses in the US alone, classified under SIC code 7311 and NAICS 54181. The companies generate a combined annual revenue of $30.6B and employ just under 160,000 people. The average advertising agency has $2,136,000 in annual sales with a staff of 11. During the 2002 – 2007 period the annual sales per firm grew 26.4% while staff increased by just 3.9%.

Advertising agency valuation

Successful advertising firms are frequent acquisition targets. The typical buyers are competitors and financial investors, especially for larger companies. This offers you a basis for valuing your firm by comparison to recent sales of similar businesses.

Consider using completed business sale prices in relation to the sold companies financials. The ratios are known as valuation multiples that you can use to calculate your company’s value.

Business sale price to gross revenue or net sales is the typical basis to develop such valuation multiples in the advertising industry sector.

Example: Valuation of advertising agency based on its gross revenue

Let’s take a look at a typical private advertising company with annual revenues of $2,130,000.

We now select a set of valuation multiples and apply them to our sample business sales figure:

Multiple Multiple value Business value
Low 0.24 $502,680
High 10.76 $22,924,125
Average 2.61 $5,562,069
Median 0.68 $1,442,649
Average Business Value $7,607,881

Note that the range of values is quite wide. This may be due to synergistic buyers entering the market to acquire highly desirable companies at premium prices.

More on advertising agency valuation

As we have shown, recent advertising business sales give you an excellent basis to come up with a value for your firm. In addition to annual revenues, you can value the business based on net profits, EBITDA, cash flow and assets.

Are you considering valuation of a commercial building contractor firm? Check out these industry statistics:

There are some 38,000 commercial and institutional construction companies, classified under the SIC code 1541 and NAICS 236220. These construction firms generate a combined $372.5B in annual revenues. The industry sector employs an impressive 654,178 of professional and administrative staff, down 6% from 2002. During the construction boom of 2002 – 2007 the value of construction work done per employee in the sector grew 61%.

The average commercial building construction firm does $9.791M in annual sales with a staff of just over 17. The average revenue per employee in this construction industry sector is $56,201.

Building contractor business valuation

Commercial construction companies with a solid track record of profits and strong customer following are highly desirable acquisition targets. This is good news if you need to value an established contractor business.

You can use the recent business selling prices in relation to the sold companies financial performance numbers. This gives you valuation multiples to use in calculating your company’s value.

For privately owned commercial building contractors, the most typical valuation multiples are these:

Example: Business valuation of commercial building construction firms

Let’s illustrate the concept by valuing a typical contractor company with these financial figures:

  • Revenue: $9,791,000
  • SDCF: $1,700,000
  • Furniture, fixtures and equipment (FF&E) assets: $300,000

Next, we pick the valuation multiples calculated from recent sales of businesses in the sector and apply them to the financials above to calculate the business value:

Multiple Multiple value Business value
Business value to gross revenues 0.324 $3,168,893
Business value to SDCF 1.862 $3,165,555
Business value to FF&E assets 11.520 $3,456,461
Average Business Value $3,263,636

Another way to report your business valuation result is to indicate a range of values, from low to high. In this case the company value will likely fall somewhere between $3,165,555 and $3,456,461.

Commercial construction contractor valuation by capitalization methods

Building contractor companies also can be valued by direct capitalization methods under the income approach. Instead of comparing your business to other firms, your valuation focuses directly on your company’s earnings capacity and risk.

A common method of valuing privately owned building contractors is the multiple of discretionary earnings technique. This valuation method lets you determine business value by capitalizing its earnings. The capitalization rate is built up based on your assessment of a number of key financial and operational performance factors.

Commercial Contractor Valuation

Current selling prices of similar construction firms offer you market proof of business value. You can value businesses in this industry based on their gross revenues, net sales, profits, EBITDA, cash flow and assets.

See Example »