Opinion: What’s the Multiple?

A picture of Carrie Stacey

If I had a dollar for every time I’ve been asked, “What’s the multiple?” I’d be rich.

When business owners ask this question, they really are asking what is the multiple for their business. Every business’ multiple is different.

Microsoft’s multiple is different from Apple’s multiple. GM’s multiple is unlike Tesla’s multiple.

Each organization may be in the same industry, but every company is unique. Business buyers evaluate those subtleties.

As we look at the top factors influencing your multiple, understand the range of multiples for sale transactions includes only tangible and intangible assets, and goodwill is roughly 0 to 3.5 times earnings.

Let’s find out where your business ranks.

What Is a Multiple?

A multiple is the rate of return, upside down. If you have a $100,000 annual profit and select a multiple of 2, your business’ selling price is $200,000.

  • The return on investment is profit ($100,000) divided by selling price ($200,000)—or 50%.
  • The payback period is two years, meaning two years of profits are required to pay back the purchase price.
  • An investor needs a 50% rate of return to pay $200,000 for that $100,000 yearly profit stream.

When determining the multiple, we are establishing the rate of return a buyer needs to buy the profit stream.

Multiple of What?

One business might own its real estate free and clear, so the business pays no rent. The same business might be run by a man whose wife is CEO of a large public company, so he does not need to pay himself a salary. Therefore, the business might show a significant profit.

Is that business more profitable than a similar one down the road with the same revenue but paying expenses, including rent and market wages for a general manager to run the business?

Maybe, but maybe not.

To compare and evaluate businesses against each other, we adjust (normalize) income statements to reflect the profit
a self-sustaining entity produces. The business needs a facility to operate, so how much would any owner have to pay for the space? The business needs a general manager/owner, so how much would hiring a competent executive at market rates cost?

Income statement adjustments remove any unrelated revenue and expenses, such as vacation rental property owned by the same company, a one-time Paycheck Protection Program loan that has been forgiven, or the one-time fraud prosecuted some years before.

We adjust all necessary expenses to average market rates, whether the business is paying more or less than market rates.

Buyers, investors, bankers and the IRS will use the resulting adjusted profit to assess your business’ value.

What’s in the Multiple?

In divorce and succession cases, often the transaction involves everything on the balance sheet and goodwill. Items can include the business’ cash, accounts receivable and accounts payable, any long-term debt, real estate, inventory and goodwill.

Unlike cash or real estate, goodwill is an intangible asset that values items such as the company’s brand, customer base, customer and employee relations and proprietary technology.

When owner-managed businesses sell to outsiders, we typically base the selling price on a cash-free, debt-free package. The multiple includes fixed assets, average parts inventory and goodwill only. The business is sold along with vehicle inventory and real estate.

As a result, the same organization could have very different multiples depending on what the measure includes.

What Is Your Multiple?

Buyers, valuators and bankers use a multiple of past results to estimate future results. To do so, they look at historical averages. One single good year is usually insufficient to motivate a buyer to pay more for the company than historical averages would suggest.

Five crucial factors are driving a business’ multiple. We will address them in order of importance, beginning with adjusted profit.

Adjusted profits are the most critical factor because a buyer wants to know how much the business earns and how profitable it is in real cash. More dollars of profit mean more dollars in a sale.

Absolute numbers are not enough, however. Determining profit as a percentage of total revenue is key. A business with $400,000 in profit from $4 million in revenue (10%) is great and leads to a higher multiple. A business with $400,000 in profit from $20 million in revenue (2%) is barely sustainable, so the multiple is lower.

Comparing profits to the industry benchmark is also key. Profits at or above the industry benchmark earn higher multiples and sales prices.

Fluctuations in profits play a role as well. Ideally, buyers want to see revenues and net profits trending consistently up. Big fluctuations will drive multiples down.

Although nearly everyone in the RV industry had fabulous financial results in 2020 and 2021, buyers often look at profit trends over multiple years. Some buyers today are ignoring those results altogether and looking at finances from 2017-2019 to forecast a dealership’s future earnings. I like to blend the years prior with the year after because I believe the future will be somewhere in the middle.

Location ties with adjusted profits as the most crucial factor. Two identical organizations with identical results but operating in two separate locations will most likely have different multiples.

Buyers pay more for businesses in more urban areas with abundant amenities. In smaller centers, or more rural or seasonal locations, buyers must either be enticed to relocate there or be willing to risk monitoring a distant organization.

In either case, the buyer expects a lower acquisition price to compensate for the risk. That means a higher return on investment and a lower multiple.

For a business is in a desired region, however, the multiple will be higher. Think about all the people leaving California to move to Idaho or Nevada.

Product lines carried ranks next. If the buyer likes the profitability and location, the very next question always is what lines the dealership carries. Well-known, reputable lines are worth more than RVs made with poor quality or by little-known manufacturers.

Staff makes our businesses profitable and ranks next because buyers know knowledgeable staff are key to success.

There are two types of arm’s-length buyers: owner-operators and investors.

Investors are seeking organizations with a proven GM in place who is likely to stay. As the organizations grow, finding owner-operator buyers with sufficient net worth to acquire the enterprise becomes more difficult. If you are contemplating selling a larger company, or a rural business, consider hiring a competent GM who can run your organization in your absence. A capable GM increases the buyer candidate pool significantly, which raises your multiple and the selling price.

Employing long-term, skilled staff means customers satisfaction will continue beyond a change in ownership. If your business suffers from high turnover, in-fighting or vacancies open for prolonged periods, the business’ value is truly reduced. Such a work environment is likely affecting your overall profitability. Resolving the situation as quickly as possible will pay off.

Books and records are the final key factor. Having cash coming into the business is great, but if the business fails to list the money on a tax return, that asset cannot boost the sales price. Any multiple times $0 is $0. Be sure you pay your taxes and accurately account for all funds. Otherwise, you will realize the difference when you sell your business for less.

You need current statements with updated tax returns. A lack of credible financial information reduces the selling price.

The balance sheet should have usable, easy-to-follow information. If your business has an income statement containing dozens of accounts, each with minor balances, a buyer cannot use the information to do an analysis (nor can you).

Your inventory should be audited. Parts inventory is effectively stacks of money sitting on your shelves. Outdated inventory is worthless. Buyers will look for obsolete, dead inventory by the thickness of the dust on it. Clean up and discard your old inventory. Buyers often will not pay for anything over two years old.

The Multiples

In my experience, and as various databases show, the most common multiples for this industry are 2 to 3.5 times adjusted profit before tax and amortization, including fixed assets, parts inventory and goodwill, plus vehicle inventory and real estate.

All other assets and liabilities remain with the seller. This example is for a seller with profits at industry benchmark levels and in
a decent location.

Buyers’ decisions are affected by the economy as well. The current economy’s uncertainty and volatility are making buyers much more cautious. If you want a sale fast, you probably will need a lower multiple.

The mitigating factor in today’s market is prospective buyers have more money than ever. Like every other period of chaos, this too shall pass. Investors will search for a path to wealth and buy businesses.

The most important action you can take to ensure the highest multiple when you exit is to ensure your profits meet or exceed industry benchmarks after paying all expenses at market rates.

Carrie Stacey is the owner of Stacey & Associates, a company specializing in business valuations, mergers and acquisitions, consulting, coaching and benchmarking geared at dealerships. She is a licensed CPA in the U.S. and Canada. She also worked as general manager at both marine and RV dealerships. Additionally, early in her career, Stacey spent several years in professional sales.

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