Finding the correct multiplier

How much is your business worth? Finding the correct multiplier

Welcome back to the second blog on how much your business is worth and how we figure it out. This month we’re talking about finding the correct multiplier to use for net profit.

One of the most common questions in the valuation process is how did you arrive at the correct multiplier of net profit? The answer seems simple however the use of the correct multiplier is what makes the difference between a good valuer and a bad valuer. By analysing actual sales evidence from similar business or property sales within a suitable location, we can then extract the correct multiplier.

The following table shows a series of sales within the pharmacy sector, which are broken down for comparison:

Date of Sale	Turnover	Gross Profit	Adjusted Net Profit	NHS Items	Sale Price	Multiplier
06.03.2014	£984,866	£335,584	£192,062	6,650	£990,000	5.1
20.02.2014	£567,973	£167,349	£90,550	4,011	£550,000	6.1
03.01.2014	£2,199,468	£745,577	£377,350	13,400	£2,440,000	6.4
03.04.2014	£316,717	£105,040	£14,374	1,750	£150,000	10.4

 

The correct multiplier can be extracted by dividing the sale price by the adjusted net profit. As you can see the sales evidence has been broken down by each component of the business so that a true comparison can be made to the business that you are valuing. From the evidence above the multiplier is between 5 and 10. It is then down to the individual valuer to decide a value in that range. This is where the skill of the valuer comes in. Using their experience within the specific business sector they will apply a multiplier that they believe reflects the current business.

Next month: How do you arrive at the adjusted net from company accounts?

For more information around valuation and sales our Blog and What We Do pages may help.

If you would like more information or have our blogs sent by email please request this from our contact us page or email [email protected]