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Industry Trends for Market-Based Valuation Multiples

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Almost all business owners wonder what their business is worth if they were to try to sell.

The actual amount that a particular business sells for depends on many factors such as profitability, growth, industry, customer base, etc. However, it is always a good idea to keep an eye on trends and general benchmarks regarding the sale price of businesses in your industry.

 

The following table shows median values for market-based valuation multiples for the sale of privately-held businesses by industry for the three years ending 2009. Data analysis for 2010 has not been reported at this time. 

 

A common market-based valuation multiple as shown in this table is represented by Market Value of Invested Capital (MVIC) divided by Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). MVIC represents the total consideration received by the seller of a business excluding the value of real estate or incentive-based consideration. EBITDA is a common metric used to compare the earning capacity of different businesses. Simplified, MVIC divided by EBITDA is the sale price divided by the earnings of the business. Multiplying a valuation multiple times the earnings of a business is commonly referred to as a market-based valuation method.

 

Market-Based Valuation Multiples (MVIC/EBITDA)

By Industry For All Sales Ranges*

 

SIC Code	Industry	2007	2008	2009
1521-1799	Construction	3.67	3.85	4.22
2011-3999	Manufacturing	5.68	4.93	3.33
4011-4971	Transportation, Communications, Electric, Gas & Sanitary	2.82	3.26	2.53
5012-5199	Wholesale Trade	3.66	3.83	7.94
5211-5999	Retail Trade	3.73	2.24	2.08
7011-9999	Services	4.52	3.32	2.92

 

* Source – Pratt’s Stats Private Deal Update Newsletter 1^st Quarter 2010

 

There are several interesting observations that can be drawn from this data. While valuation multiples for most industries went down last year, median valuation multiples for construction and wholesale trade went up. It is not surprising that valuation multiples for most industries went down but it is very interesting that the median multiple for construction related businesses went up. It’s also interesting to note that median valuation multiples for the wholesale trade industry more than doubled last year.

 

Any statistic, including median valuation multiples, should be viewed as a statistical benchmark and nothing more. The fact that the median wholesale business sold for 7.94 times earnings in 2009 means that 50% of wholesale businesses sold for less and 50% sold for more and could even be a statistical anomaly. The data in the table above would be even more meaningful if it were stratified or categorized based on annual revenue/sales. Businesses with sales over $5 million sell for a higher multiple than businesses with annual sales of $1 million.