Are business valuation multiples on the rise? What’s pushing up business value

The 'multiple' buyers and investors are prepared to accept is on the rise but the trend doesn’t apply to all businesses. So, what makes the difference?

Let’s start with the importance of business valuation multiples. The majority (but not all) small and medium businesses (SMEs) are valued on a multiple of earnings basis. The multiple will affect the value of a business in a transaction or an investment in the business. The higher the multiple, the greater the value of the business.

The 3 influences driving up multiples

There are three key influences putting upward pressure on multiples:

1. The race for scale.

With costs and competition increasing for many businesses, scale can make the difference. It can also be a fast-track growth path where organic growth is slower.

2. The impact of technology

For tech businesses or those that deliver services online, and in particular where they operate under a subscription model, value might be assessed on a multiple of revenue rather than a multiple of earnings. In these cases, the comparable multiple of earnings is much higher than would be achieved under more traditional valuation approaches. 

3. The influence of Private Equity (PE)

There has been significant growth and an increasing push of PE into Australia and it is reaching into a lot of different sectors. Increasing demand generally results in upward pressure on multiples in that sector. And, PE has the capacity to be price competitive.

These are all positives for the value of Australian businesses, but as with most things, there are qualifications. The obvious one is whether your business is in the tech space or a sector where private equity is active. The less obvious qualification is that in all these areas, when buyers come looking, they normally seek out the higher quality, better performing businesses. To expect, and to benefit from the higher multiples on offer, it is not enough to be in the right industry or sector, you need to be able to show above average performance for your sector and ideally a growth path in both revenue and profit.

So, it’s critical to know your numbers and how you benchmark in an industry. And, don’t be misled into believing that all businesses in a sector will be valued the same.

The value of the enhanced multiples can be up to 50%. Being able to increase your business value by up to 50% will be meaningful for most business owners and worth spending time on.

Want to know how to increase your business’s value? Get in touch with Greg or your services director.