I was raised in a family where teaching was frequently a chosen profession. My mother, her sister, an uncle, 1st cousin, and others pursued the noble career path of developing minds for future success in society. Knowledge is power. One of the most important valuation principles in mergers & acquisitions uses a math principle, most children learn by the third grade, multiplication (https://youtu.be/dPksJHBZs4Q?si=oLJpFlit2_gSxUZ0). The two numbers multiplied in the calculation of an estimated value for setting a desired business sale or acquisition price are EBITDA (Earnings Before Income Tax, Depreciation, and Amortization) and an appropriate multiple likely having variance depending on who is doing the assessment, add-backs for non-reoccurring and discretionary expenses, and subjective assessment of the unique components of a company, its industry, geographic location, present market demand, financing availability, etc.
All in the business brokerage profession whether selling family businesses on Main Street or negotiating nine figure transactions as investment bankers acknowledge that business valuation is a sophisticated, nuanced, subjective science where ten professionals with similar knowledge & experience have a probability of coming up with ten different figures in their assessment of value. Ultimately, the true value of a company is what a willing seller and buyer agree to in a negotiation. What that value will be depends on what can be justified and can be greatly influenced by the knowledge, experience, and skill of the business broker facilitating negotiations (https://ibainc.com/blog/gregory-kovsky/selecting-a-business-broker-to-sell-your-company/).
Acknowledging that there is not one correct answer when valuing a business, as the President & CEO of IBA, the Pacific Northwest’s oldest and largest business brokerage firm and a recognized expert on the valuation of privately held companies & family owned businesses by the Small Business Administration (SBA), business appraisal community, the accounting and legal professions, real estate community, and the banks financing business acquisitions in the Pacific Northwest, I thought I would take this opportunity to share knowledge regarding the six primary components that go into determining an EBITDA multiple. The stronger the ability to assess each of these areas by the party valuing the business the more accurate the EBITDA multiple will be for determining the estimated market value of a specific company.
The first primary element to assess in determining an EBITDA multiple is the company’s competitive position in its marketplace. Is it stable, gaining, or losing market share? Is it competing on price, quality, knowledge, and/or customer service? Does exclusivity or semi-exclusivity exist in the market for the company’s product or service offering? The stronger a company’s competitive position in the marketplace the higher the multiple. For this reason, it is always a stronger position to sell (Higher EBITDA Multiple) when things are going well for a company rather than when the business is experiencing turbulence in its revenues, client retention, marketing strategies, operations, or personnel.
The second component in determining an EBITDA multiple is an assessment of the industry of the subject business. This is not a component an individual business can control or influence. However, higher business values are always achieved in transactions in industries that are thriving than in ones that are stagnant or in decline. The ability to assess an industry in a specific state or region enhances the accuracy of this multiple component.
For example, IBA is recognized as one of the premier business brokerage firms in the Pacific Northwest related to facilitating the sale of manufacturing, transportation, and construction companies. A complete list of our industries of expertise as M&A intermediaries can be found on this page of our website: https://ibainc.com/industries-served/ IBA is actively involved in a spectrum of trade organizations in our served industries and has numerous professionals on our business brokerage team that have worked and owned businesses in the economic sectors they represent as intermediaries. It is our professional opinion that robust activity will be occurring in the manufacturing sector in 2025: https://ibainc.com/blog/gregory-kovsky/why-2025-is-an-excellent-year-to-sell-or-buy-a-manufacturing-company/
The third element to assess in determining an EBITDA multiple is the revenue, expense & profit trends for the subject business. Customers vote in the business world with their dollars. The more votes a business receives, the higher the business value. I often use the analogy of trying to rise up the AP NCAA basketball rankings and punch a ticket into the college basketball playoff called March Madness, when discussing how to maximize value when selling a privately held company or family business. It is in a business owner’s “best interest” to finish their current entrepreneurial year with the maximum number of wins and displays of market dominance doing what they can to increase revenues & profits and mitigate expenses all the way to the end. A proper assessment of this element should include analysis of 2022, 2024, and a running twelve-month time period analysis. An assessment of financial performance in 2022 provides a view of what the company did historically. A review of 2024 provides analysis of the last completed year of performance. The running twelve-month analysis provides real time information that can be incorporated into an assessment. The data in the 2024 corporate tax return will quickly become dated, by April it will be over 100 days old. Would you buy a publicly traded stock based on company performance as of 12/31/24 when Q1 2025 financials are available for review? The United States economy is currently in evolution. We have new political leadership in Washington DC. Tariffs, taxes, and interest rates are all likely change in 2025. Change creates opportunities and the need to modify business models. Those that evolve correctly are likely to thrive, those who fail to change appropriately, are likely to stumble. The best entrepreneurs shine in turbulence, the weak falter. Both occurrences impact business valuation.
The fourth component to assess in determining an EBITDA multiple is the clarity of the financial records of the business and the operational infrastructure in place. Financial records of a business in a sale need to pass scrutiny traditionally by a buyer, their accounting professionals, and a bank and/or investors. The better the financial records are the higher the EBITDA multiple and value of the business. It is in your best interest to detail your vehicle to make a strong first impression on buyers prior to selling a car. It is equally true it is in your best interest to provide clear & accurate financials to potential buyers when selling a business. Operational systems like business plans, employee manuals, SOP’s, a current technology website, marketing & advertising plans, and sales training programs also enhance multiples and the value of privately held companies.
The fifth element to assess in building a composite EBITDA multiple for valuation of a privately held company or family business is the risk associated with a change of ownership. Companies with strong middle management and employees have higher EBITDA multiples and values than companies where the owner is the dominant hub for executive decisions, sales, and/or production. A business owner who has built an employee team that can run the business in their absence will also be able to transition out of the company quicker after the sale is completed. Reoccurring revenue, long term customer relationships, and occupancy stability also mitigate buyer risk enhancing EBITDA multiples and business valuations.
The final major element to be assessed in determining an appropriate EBITDA multiple to value a company is the most subjective element, the desirability of the business in the marketplace. The assessment of this element requires a professional that is actively engaged in the relevant mergers & acquisitions marketplace. The desirability of businesses can range significantly based on industries and geographic locations with a resultant impact on EBITDA multiples and business valuations. Universal & national EBITDA multiples are convenient to employ, but inherently flawed. Business valuation like real estate valuation is a venue where local knowledge & experience are king. A new construction, five-bedroom, three-bathroom 3000 square foot house in Sumner, Washington will sell for a different value than one in West Linn, Oregon based on market conditions. The same is true for a chain of quick service restaurants based in Inland Empire of Washington versus one in Multnomah County in Oregon when market demand, relevant state & municipal taxes, employee labor rates, and occupancy costs are taken into consideration.
Broker Note: Caution should also be used when referencing sold comparables removed from the operational areas of a business. The following previously published content highlights some of the issues with using sold comparables for business valuation: https://ibainc.com/blog/gregory-kovsky/the-five-reasons-sold-comparables-are-problematic-as-a-business-valuation-tool/
It is always prudent to engage a business broker with experience selling companies in the relevant geographic location and industry if transaction goals include a timely sale of the business at the maximum possible market value. It should be noted that IBA sold more businesses in 2024, than any other business brokerage firm in the Pacific Northwest.
An assessment of the six primary components of an EBITDA multiple allows a composite multiple to be built. IBA, as the premier business brokerage firm in the Pacific Northwest and the proud facilitator of over 4300 transactions since 1975, generates EBITDA multiples two places to the right of the decimal for its clients in an effort to provide as accurate an assessment of the business value as possible before taking a privately held company or family owned business to market. Our business valuation knowledge is consistently confirmed by the marketplace with an overwhelming majority of the businesses we represent for sale selling within 10% of their asking price. We also cannot recall a time when one of our business valuations did not pass scrutiny of a third-party business appraiser as part of a SBA loan process.
If you own a business in the Pacific Northwest, are interested in selling in 2025, and would like to know how to value a business or what your business is worth, our team of experienced business brokers working out of our nine Pacific Northwest offices, Bellevue, Bellingham, Everett, Federal Way, Olympia, Wenatchee, & Spokane in Washington and Portland & Bend, in Oregon, with industry specific knowledge would welcome the opportunity to provide an overview of our client services. 100% of IBA’s fees for “sell side” clients are paid upon completion of the transaction. All conversations with IBA are held in strict confidence.
It should be noted that IBA’s complimentary, business evaluations serve two purposes for our firm. Client-facing, they allow our professionals to provide business owners with an introduction to our market leading knowledge, experience, and professional skill set without any obligation by the seller to engage IBA for representation services. On IBA’s side, they allow our professionals, who work on a performance based compensation model, to assess if the business sale project is one they are interested in taking on as an intermediary, if the business owner is realistic about their company’s market value, and if the entrepreneur will be a good collaborative partner to work with during the sale process. IBA, as one of the most selective business brokerage firms in the region, traditionally represents 1 of 3 companies where it provides a professional opinion of market value to ownership. 80 – 90% of selected projects are sold in less than a year.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, accounting, legal, wealth advisory, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.