What Actually Sets Your Valuation Multiple
Two businesses, same sector, same turnover, roughly the same profit. One sells for four times that profit. The other sells for fifteen times. How?
If you’re sitting with a look of confusion on your face at that statement, it’s because nobody has told you how a multiple actually works when it comes to selling or valuing your business, and you could be left wondering why your number came in so much lower than you hoped for.
A multiple is not a fixed figure you can look up for your sector and apply to your profit. It moves, business by business, on a specific set of factors. Understand them and you can look at your own business and see roughly where you sit, and what would move you.
Quality of earnings
A buyer is not really buying last year's profit. They are buying next year's, and the year after that. So the first question underneath any multiple is: how much of this profit can I trust to repeat? A business with a long trading history, consistent margins, and no lucky one-offs propping up the numbers earns a higher multiple than a business whose profit jumped because of a single contract that won’t be repeated. Predictability, not just size, is what a buyer is pricing.
Contracted, recurring revenue
Revenue that is contracted, tied up in agreements that carry forward past completion, is worth more than revenue you have to win fresh every year. It’s the clearest signal of predictability a buyer can find, and it tends to move the multiple more than almost anything else on this list.
Customer concentration
A business built on two or three large clients carries risk a buyer has to price in, because if one of those relationships wobbles after completion, so does the business they just paid for. A spread of customers, none of them able to sink the business alone, is worth a real premium.
Sector
Some sectors simply attract higher multiples than others, because of growth prospects, consolidation activity, or how many buyers are actively looking to acquire in that space right now. This one is largely outside your control, but it’s worth knowing where your sector sits before you assume your multiple should look like a business you read about in a different industry.
Balance sheet position
Cash sitting in the business at completion is typically added to the price. Debt is typically deducted. This sounds simple, and it is, but it means the balance sheet is doing real work on the final number long before anyone discusses the multiple itself. A business that has been steadily strengthening its balance sheet is building value that will show up at the very end of the process, not before.
Management depth
If the business can’t run for six months without the owner, a buyer is not really buying a business. They are buying a job, and they will price it that way. A management team that can run the operation, make decisions, and hold client relationships without the founder is one of the single biggest levers on a multiple, and one of the hardest to build in the twelve months before a sale, which is exactly why it needs to start years earlier.
What this means for you
Ultimately, a business is worth what a buyer is willing to pay for it, on the day, in that negotiation. No formula overrides that. But these are the things that move the number a buyer arrives at, and they are, almost all of them, things you can influence over the next one to three years if you choose to.
Look at your own business against this list.
Where is your earnings quality strong, and where is it propped up by something that will not repeat?
How much of your revenue is actually contracted versus won fresh each year?
How concentrated is your customer base?
What does your balance sheet look like right now, and where is it heading?
And could the business survive six months without you in it?
You don’t need to be selling next year for this to matter. The businesses that command the strongest multiples are the ones that have been building these things for years before you’d even considered a sale at all.
If your business has reached a level of complexity that requires strategic financial support, take a look at how we can help and get in touch for a complimentary consultation.