There are a several ways to determine the value of a business. Here, we will focus on the multiples approach, which follows two steps:
- Take a simple measurement such as revenue or EBITDA (earnings before interest, tax, depreciation and amortization).
- Apply a multiplication factor based on industry sales or comparable companies in the sector.
While this approach may seem simple, there are many factors that need to be considered.
If you are looking to value your business, you've come to the right place. The team at Nash Advisory can give you a fair and balanced outlook over the valuation of your business, giving you ways to improve its value before you sell.
The fundamental rationale behind multiples-based valuation is that businesses in the same industry or sector should be valued based on their comparison to other similar businesses.
- For example, a business with an EBITDA of $10 million, with comparable EBITDA multiples of between 6 and 8 times, would likely be valued between $60 million and $80 million.
For some sectors, an EBITDA multiple is not the most commonly utilised metric. For instance, Financial Services tends to trade on Price / Earnings (PE) ratios, while Transport trades on Earnings before Interest and Tax (EBIT) multiples.
Multiples
The table below summarises the multiples observed across a range of sectors Nash Advisory covers, as well as our view on the mergers and acquisitions outlook over the next 3 to 5 years for each sector. It is important to note that these EBITDA multiples are based on historical transactions, typically of companies with an Enterprise Value of over AUD $200m.
Source: Mergermarket, Nash Advisory analysis
In addition, there are a few key factors which can add or detract between 0.5x-1.5x on a multiple for a particular company, being:
- Depth of the management team
- Geographic coverage
- Strong brand recognition in the market
- Size and scale
- Reliability of revenue and earnings (recurring or once-off).
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The financial sector tends to trade at high multiples to EBITDA, of between 7-12x.Some outliers can be as low 3-4x or as high as 14-20x. The ranges are largely dependent on:
- The diversity and nature of earnings
- The level of assets required for the company
- The kind of markets that the company operates in
With the rapid changes and improvements in technology, the regulatory environment and the rising consumer focus, the financial sector is receiving a high level of interest from parties wishing to buy and sell in the wake of these potential changes.
Food Processing
As this sector is fairly diversified, the EBITDA multiples tend to reflect this variability. Sale multiples range between 5-10x. This range is largely dependent on:
- Level of exposure to major supermarket chains
- Diversity of product lines
- Consumer trends for products or product segment
- Split of domestic versus international sales
- Reliability of supply relationships
Changes in the market are giving consumers better choice in how and where they spend. Major strategic and financial buyers are on the lookout for unique businesses to acquire, thanks to the growing market dominance of large supermarket chains and premium brands.
Waste and Industrial
The Waste and Industrial space has been a challenging area for businesses to grow in. However, businesses in the sector have shown both resilience and ingenuity to redefine business models to differentiate themselves and create value.
Multiples in this sector are between 4-10x. These can be dependent on:
- Level of assets in the business
- Level of vertical integration of services
- Regulatory environment
- Specialisation and barriers to entry
- Contracts with government
With both state and federal governments focusing on environmental policy changes, companies that can help are highly sought after. In addition, large diversified industrial companies are continuing to acquire to increase overall capability and strengthen their growth potential.
To learn how Nash Advisory can assist you with the sale of your waste and industrial business, please read our case study on Total Drain Group.
Education
The education sector is characterised by public sector, private sector, NGOs and not-for-profits, which makes for a unique blend of interests and motivations. As Australia’s third largest export industry behind iron ore and coal, investment from government will play a key role in filling the economic void left by international students during the pandemic.
Multiples for this sector range depending on the type of service provided, but typically are in the range of 5-12x. This can be dependent on:
- Type of service provided
- Length and breadth of course offering
- Quality of content and courses
- Type of courses offered
- Types of students
Although many sectors are subject to the changing preferences of governments, education is particularly sensitive to regulatory changes. Given the economic tailwinds supporting long term growth in the sector, interest has come from local and international buyers, including strategic and financial buyers.
IT and digital
As the adoption of technology has accelerated due to the pandemic, the diverse needs of the consumer have allowed small to medium sized businesses to carve out profitable niche businesses without bumping heads with the major international corporations.
Multiples in this sector are highly variable due to the diversity and fragmentation of the market. Multiples range from 6-14x and can be dependent on:
- Revenue or business model
- Quality of clients and spread of customers
- Scalability of business model
- Presence in multiple markets
- Pace of change of technology
Given the ability to scale and outsource to remain cost-competitive, acquisition activity has been supported by large strategic buyers. Other interested parties also include those looking to vertically integrate services into their existing offerings, and financial sponsors attracted by the consistent earnings and growth of the sector.
To learn how Nash Advisory can assist you with the sale of your IT and digital business, please read our case study on TenderSearch.
Energy, Power and Utilities
As an investment driven sector, major investment firms, superannuation funds and private sector giants compete to deliver cost effective and sustainable sources of energy, water and gas.
Multiples in this sector generally range from 6-10x and can depend upon:
- Number of customers
- Cost per customer acquisition
- Generation capacity
- Sustainability of the technology
A range of macro-economic and political factors continue to push investment in to the sector. Innovations created by these investments and a societal shift toward low carbon and renewable energy sources are expected to lead to further acquisition activity.
To learn how Nash Advisory can assist you with the sale of your energy, power and utilities business, please read our case study on Water Treatment Services.
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Transport and Logistics
In Transport and Logistics, growth has typically been found in new entrants with a focus on a technology-enabled solutions that facilitate operational efficiency, cross-border support, parcel tracking and deep sector expertise.
The multiples for this sector tend to trade between 5-15x. This is dependent on a number of factors:
- Volume of cargo managed
- Cartage specialisation
- Geographic partners and their effectiveness
- Access to priority trade routes
- Supply chain support
- Type of logistics operations
- Level of automation
Large organisations need to consider how they can remain relevant as consumer and business purchasing trends change because of the pandemic. Acquisition activity in the sector is expected to be strong as businesses seek every advantage possible to compete in congested trade routes.
Healthcare
The Healthcare sector remains a seller's market, with the diversity of buyers leading to higher multiples across the board.
Our research suggests the multiples in healthcare can be in the range of 6-14x. This varies depending on:
- National presence
- Effective use of technology
- Exclusivity on product or category distribution
- Contracts with government
- Scalability
- Growth prospects
Global trends affecting healthcare include COVID-19, ageing populations, increasing life expectancy, technology proliferation and private sector involvement. Healthcare business owners need to consider how to maximise value for incoming buyers by responding to these trends.
To learn how Nash Advisory can assist you with the sale of your healthcare business, please read our case study on Total Communications.
Tourism
As arguably the hardest hit sector by the pandemic, tourism operators have been forced to pivot their offerings to domestic tourists. Government stimulus and a resurgence in domestic travel has created an environment where select tourism businesses can operate profitably.
Multiples for tourism businesses can be in the range of 6-12x. This is largely dependent on:
- Target demographics
- Service offering
- Barriers to entry
- Contracts or licenses for operations
- Capital intensiveness
As domestic tourism drives the industry, private equity firms and global tourism operators are continuing to grow via acquisitions. Deal activity is continuing to recover and given the level of sophistication of buyers, it is important for tourism business owners to consider how they structure their business.
To learn how Nash Advisory can assist you with the sale of your tourism business, please read our case study on Lake Argyle Resort.
eCommerce
The COVID-19 pandemic dramatically accelerated the adoption of eCommerce and radically changed the growth trajectory of the sector. Shifting consumer habits because of the pandemic have been a huge tailwind for the industry, with a plethora of new entrants to the market.
eCommerce businesses are generally valued on a revenue multiple to reflect high growth potential and recurring or repeat revenue patterns. Revenue multiples for eCommerce businesses tend to be in the range of 0.7-3x. These can be dependent on:
- Customer profile and purchasing patterns
- Growth stage of the business
- Level of brand recognition
- Website and software quality
- Supply chain agreements
- Sales diversification
Favourable sector dynamics have seen the eCommerce sector attract interest from private equity and large strategic buyers. These buyers are particularly interested in customer profile and purchasing patterns, emphasising the value of repeat customers.
Professional Services
Like many, the professional services industry has experienced a period of disruption as firms adapt to the advantages and disadvantages of work-from-home. Employee burnout has been a key area of focus in the industry, as demand for professional services is fuelled by “cashed-up” corporates.
Multiples in the sector can be highly variable and generally range from 5-12x. This is generally dependent on:
- Length of client relationships
- Contracted/recurring revenue
- Key man risk
- Specialisation in growing markets
- Incorporation of internal IP and digital tools
- Ability to attract and retain talent
Fragmentation within sub sectors of the industry offers large trade buyers and private equity investors the opportunity to build scale through acquisitions. Given the level of sophistication of buyers in this space, it is important that firms have streamlined internal processes and can access data to demonstrate achievement against KPI’s.
To learn how Nash Advisory can assist you with the sale of your Professional Services business, please read our case study on Point Advisory.
