Recently, we provided an introduction to some of the most common business value drivers that every business entrepreneur needs to be thinking about when buying or selling a business. In case you missed it, here is a link to the "Prevailing Market & Economic Conditions" discussion.
This month's topic relates to "Prevailing Industry Conditions", and probably unsurprisingly, "different industries trade at different multiples". Further, within general industry groups, different companies will trade at different multiples based on the specific segment of the industry that the company primarily serves. For instance, a roofing contracting company might trade for a 2.5 SDE multiple (median multiple). However, digging a little deeper, a roofing company that mostly serves residential construction and home builders may trade at a lesser multiple when compared to another commercial roofing company of approximately the same size, when company B has 75% of its business generated from maintenance contracts with large stable facilities (e.g. hospitals, schools, universities). Important to review closely, as there is almost always a sub-industry within the industry to consider, and identifying what the prevailing conditions for the industry should be considered both from a general industry viewpoint and to the specific space the subject company's business model is predominantly tied to. They don't always fall directly in line with each other.
Keeping with the roofing contractor example most of us on the Gulf Coast realize that if you own a roofing business right now then your business should be "on fire" (due to recent hurricanes, hail storms, and excellent building construction consumer demand). The logical question becomes: what is the industry forecast? From a buyer's perspective, there has to be a tremendous amount of due diligence done to look at the industry forecasts over the next 3-5 years (the typical payback period), and even further out, if possible, to really gauge the full ROI potential of the acquisition opportunity.
Much like the "Prevailing Market & Economic Conditions" discussion we had, once again, Market Timing is critical to selling a business and its value. When score carding the Prevailing Industry Conditions, as a Seller, and when ultimately making the decision to sell your business you need to be able to convey to prospective buyers that the short and intermediate future of the industry and its forecast are still solid because prospective buyers will do their due diligence. Having excellent profitability numbers today is fantastic but be prepared to explain why and how the company will remain robust, or at least stable, over the foreseeable future keeping all things else constant. Make sure you take steps to set up your business to mitigate cyclical and industry concerns (if perceived to be present in your business industry), otherwise, premium business value can evaporate, and it can evaporate quickly.
If this brief topical discussion generates any questions, comments, or thoughts as it relates to you looking at a business to buy or if you are thinking about selling a business then feel free to call us at (251) 237-1030 to discuss your situation.
President, Transworld Business Advisors of the Gulf Coast