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What to pay for a business - standard ratios?

waybomb

waybomb

Well-known member
GOLD Patron
If I wanted to buy rental property, what is the usual sell price multiplier, meaning, how many times net EBITDA?

Likewise, is I were to buy a retail business (watercraft sales), what would the normal multiplier be, using net EBITDA?

And finally, a mechanical service business, multiplier of net EBITDA?
 
JMHO but I don't think it is quite that easy. I've purchased about a dozen businesses, the most recent was earlier this year.

When looking at a business, you have to narrow it down to more specifics. For example, retail business/watercraft sales might be one of several businesses. Inland might sell for a different multiple than lakefront/riverfront/oceanfront? Also the type of watercraft may impact the price significantly. A friend of mine is a yacht broker on the east coast but is based in Indianapolis, IN. He has no storefront. He brokers large sailboats (30' on up). A watercraft business could focus on personal watercraft like canoes, paddleboats and jetskis and it would probably sell for a vastly different multiple than the yacht brokerage.

The business I recent purchased was not valued on any multiple of sales/profits/etc.

Your best bet, IMHO, and this is what I do, is to talk to your business accountant and ask him to look up valuations on comparables.
 
Some Basic info, not sure as to each acquisition or business purchase needs to be looked at in its entirety as to cash return on investment. I personally only look at 4 to 5 times cash flow for business investment or purchase acquisition.

In a private or public market acquisition, the price-to-cash flow multiple is normally in the 6.0 to 7.0 range. When this multiple reaches the 8.0 to 9.0 range, the acquisition is normally considered to be expensive. Some counsel selling companies when their cash flow multiple extends beyond 10.0. In a leveraged buyout (LBO), the buyer normally tries not to pay more than 5.0 times cash flow because so much of the acquisition is funded by debt. A LBO also looks to pay back all the cash used for the buyout within six years, have an EBITDA of 2.0 or more times the interest payments, and have total debt of only 4.5 to 5.0 times the EBITDA

Bill
 
mtntopper said:
Some Basic info, not sure as to each acquisition or business purchase needs to be looked at in its entirety as to cash return on investment. I personally only look at 4 to 5 times cash flow for business investment or purchase acquisition.

In a private or public market acquisition, the price-to-cash flow multiple is normally in the 6.0 to 7.0 range. When this multiple reaches the 8.0 to 9.0 range, the acquisition is normally considered to be expensive. Some counsel selling companies when their cash flow multiple extends beyond 10.0. In a leveraged buyout (LBO), the buyer normally tries not to pay more than 5.0 times cash flow because so much of the acquisition is funded by debt. A LBO also looks to pay back all the cash used for the buyout within six years, have an EBITDA of 2.0 or more times the interest payments, and have total debt of only 4.5 to 5.0 times the EBITDA

Bill
Click to expand...

Net-net, the ratios you use are about what I was thinking as well. I was applying a higher ration to rental and a lower to service and sales. But when looking at total CF, your ratios work just fine. Anybody else have any input?
 
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