What is 'multiple of earnings'?

Posted by James Price | JPAbusiness on 15-Aug-2018 02:00:00

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Business purchasers want to know: If I buy a business today, how long will it take me to get my money back? 

Remember, the purchaser doesn’t want to pay for opportunity that they create in the future. They only want to pay for what has been built up by the vendor.

In the small- to medium-sized business market, purchasers are generally looking from one, to four and a half years, to recover the money they’ve invested.

Multiple of Earnings is the term for how many years or months a purchaser is prepared to wait before they recoup the value they paid the outgoing business owner.

Here's an example:

Imagine you’re selling your business for $1 million and I’ve assessed it as having an average Business Maintainable Earnings, looking forward, of about $300,000 a year.

If I buy your business it’s going to take me three and a bit years to get my money back.

That means I’m paying a Multiple of Earnings of about 3.3. 

The Multiple of Earnings is also a proxy for a purchaser allocating a ‘risk factor’ when considering their investment appetite. The lower the multiple, the higher the risk.

If you would like advice or information about the business valuation services offered by JPAbusiness, contact the team on 02 6360 0360 for a confidential initial discussion.

 

 How to Assess Business Value | JPAbusiness

 

JAMES PRICE | JPAbusinessJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.

 

Topics: Valuations, business advice, Business valuation, Business advisor

 
Disclaimer: The information contained in this blog is general in nature and should not be taken as personal, professional advice. Readers should make their own inquiries and obtain independent, professional advice before making any decisions, taking any action or relying on any information in this blog. 
 
 

 

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