31 Jan Ask the Expert: Industry Valuation Multiples
Question: What is the industry valuation multiple for the commercial heat treat industry? Also, is there a chart somewhere of the trends in multiples through the years?
Answer: There is no such thing. Some advisors or writers will try to “peg” a multiple for an industry, but it’s rather arbitrary, even silly. Some business owners try to think of multiples this way as well. Businesses sell for a wide range of values. Even businesses in the same industry sell for widely ranging “multiples.” This is because:
- Businesses all have unique characteristics. unique combinations of value drivers and barriers to marketability.
- Multiples expand and contract over time due to factors such as changes in the strength of the overall economy; changes in the cost of capital; changes in the supply-demand balance (between buyers and sellers in the industry at any particular time); and the quality, quantity and aggressiveness of buyers at any given time.
- Larger companies sell for higher multiples.
- Business owners go about selling in various ways. HOW a business is sold greatly impacts the ultimate sale price (and thus the multiple).
Similarly, there is no chart that shows industry valuation through the years. Almost all companies in the heat treat industry are private, and neither buyer nor seller releases terms of sale/purchase when deals are done. That being said, businesses in the heat treat industry sell for less than manufacturers of proprietary products, and more than retail businesses and many types of service businesses.
Now, my firm does some proprietary data on a handful of sales of commercial heat treat companies, but the count is too low to speak to the overall market. Even so, the prices as a multiple of EBITDA range from 3 to 6. Based on my experience, I’d say this is about the range a seller can expect for profitable companies in the industry. Three times on the very low side (a company that is profitable but with some real weaknesses) and about six times on the very high side, i.e., a firm with lots of positive characteristics, good diversification, management willing to remain and—almost certainly— solid growth.
Incidentally, several of the selling firms that we have data for did not have an EBITDA multiple because they did not have positive EBITDA. The values as a multiple of sales ranged from 0.3 to 1.25. Again, this is a very wide range of values.