Small Business Valuation using Stock Market Data

Business Stock MarketBusinesses must conduct formal valuation before buying a business, selling a business or merging with another business. However, business must also value their company one or two times a year to keep track of progress and for planning. Informal valuations may be completed internally by the owner or his delegate.

The secret sauce for any valuation is coming up with a valuation multiple. Rule of Thumb valuation is one approach to determining a multiple for your business. Rules of thumb are established from previous business sales. Businesses can get the rule of thumb for an industry from the respective industry association or a business broker who specializes in the industry. For example, Grocery stores are valued at 15% of annuals sales + inventory. However, many times the rule of thumb is not easily available or does not exist. Businesses may also not want to use rule of thumb for valuation. Another approach, discussed at length in this post, is to use market based multiples for valuation. In such cases valuation can be based on publicly traded companies within the same industry.

Enterprise Value (EV) is a commonly used for valuation. Conceptually, Enterprise Value is the take-over the value of a company. It is the net amount of cash required to acquire a business. In the event of a buyout, the acquirer takes on the debt and the cash in the business. So, Enterprise Valuation can be calculated using the following formula.

EV = Market capitalization + Debt + Minority Interest + Preferred Shared – Cash

EBITDA (Earnings before interest, taxes, depreciation, and amortization) is fundamental to valuing a business. EBITDA is a rough estimate of a businesses Free Cash Flow (FCF) and is the most commonly used metric for business valuation. Smaller businesses tend to use Sellers Discretionary Earnings (SDE) for valuation, which is also derived from EBITDA.

Once a business calculates its EBITDA the business value can be calculated by multiplying EBITDA with the Market Valuation Multiple. Market valuation multiple by industry is listed in table below. The following steps and assumptions were used to calculate the market multiple:

  1. US public company data has been used to calculate the multiple as such the data may not be relevant in other countries.
  2. Data is used in the calculation is from 2nd-Jan–2013.The EV / EBITDA multiples may have changed in the last few months.
  3. All public companies have been classified by industry.
  4. Step 1: Calculate EV / EBITDA for each company in the US (includes NYSE and NASD).
  5. Step 2: Calculate the average EV / EBITDA for each industry.
  6. Step 3: Public companies are much larger and demand a premium. So, we have discounted the multiple by 25%, 33% and 50%.  The table includes the original values as well, so you may discount it by a different amount for you industry

Market Multiples Business Valuation

Industry EV/EBITDA (EV/EBITDA)  Discount 25% (EV/EBITDA)  Discount 33% (EV/EBITDA)  Discount 50%
Precious Metals 11.370 8.528 7.618 5.685
Financial Svcs. (Div.) 14.660 10.995 9.822 7.330
Natural Gas Utility 9.960 7.470 6.673 4.980
Public/Private Equity 6.750 5.063 4.523 3.375
Shoe 7.130 5.348 4.777 3.565
Investment Co. 15.720 11.790 10.532 7.860
Retail/Wholesale Food 7.360 5.520 4.931 3.680
Packaging & Container 7.200 5.400 4.824 3.600
Entertainment 12.610 9.458 8.449 6.305
Trucking 9.410 7.058 6.305 4.705
Metal Fabricating 8.350 6.263 5.595 4.175
Heavy Truck & Equip 9.530 7.148 6.385 4.765
Semiconductor 16.220 12.165 10.867 8.110
Household Products 11.750 8.813 7.873 5.875
Auto Parts 13.100 9.825 8.777 6.550
Engineering & Const 13.240 9.930 8.871 6.620
Reinsurance 3.310 2.483 2.218 1.655
Metals & Mining (Div.) 16.270 12.203 10.901 8.135
Air Transport 5.960 4.470 3.993 2.980
Electric Utility (East) 9.210 6.908 6.171 4.605
Electrical Equipment 17.900 13.425 11.993 8.950
Retail (Hardlines) 9.340 7.005 6.258 4.670
Office Equip/Supplies 6.340 4.755 4.248 3.170
Petroleum (Integrated) 5.080 3.810 3.404 2.540
Water Utility 10.730 8.048 7.189 5.365
Petroleum (Producing) 14.980 11.235 10.037 7.490
Retail (Softlines) 11.050 8.288 7.404 5.525
Beverage 17.550 13.163 11.759 8.775
Railroad 11.020 8.265 7.383 5.510
Wireless Networking 15.640 11.730 10.479 7.820
Electric Util. (Central) 10.210 7.658 6.841 5.105
Pharmacy Services 11.760 8.820 7.879 5.880
Advertising 5.380 4.035 3.605 2.690
Furn/Home Furnishings 7.950 5.963 5.327 3.975
Retail Automotive 12.090 9.068 8.100 6.045
Insurance (Prop/Cas.) 4.240 3.180 2.841 2.120
Toiletries/Cosmetics 9.480 7.110 6.352 4.740
Steel 10.320 7.740 6.914 5.160
Telecom. Equipment 19.450 14.588 13.032 9.725
Bank (Midwest) 4.590 3.443 3.075 2.295
Telecom. Services 9.160 6.870 6.137 4.580
Telecom. Utility 5.670 4.253 3.799 2.835
Bank 4.590 3.443 3.075 2.295
Oil/Gas Distribution 18.060 13.545 12.100 9.030
Building Materials 21.240 15.930 14.231 10.620
Power 19.300 14.475 12.931 9.650
Electric Utility (West) 8.300 6.225 5.561 4.150
Cable TV 7.430 5.573 4.978 3.715
Healthcare Information 25.140 18.855 16.844 12.570
Oilfield Svcs/Equip. 13.070 9.803 8.757 6.535
Entertainment Tech 13.850 10.388 9.280 6.925
Semiconductor Equip 7.680 5.760 5.146 3.840
Hotel/Gaming 16.440 12.330 11.015 8.220
Retail Store 8.930 6.698 5.983 4.465
Maritime 14.740 11.055 9.876 7.370
Coal 5.850 4.388 3.920 2.925
Thrift 4.390 3.293 2.941 2.195
Publishing 6.090 4.568 4.080 3.045
Recreation 15.070 11.303 10.097 7.535
Chemical (Basic) 7.290 5.468 4.884 3.645
Chemical (Diversified) 9.440 7.080 6.325 4.720
Electronics 13.170 9.878 8.824 6.585
Aerospace/Defense 16.860 12.645 11.296 8.430
Foreign Electronics 4.460 3.345 2.988 2.230
Human Resources 10.380 7.785 6.955 5.190
Computer Software 38.060 28.545 25.500 19.030
Food Processing 11.200 8.400 7.504 5.600
Med Supp Invasive 25.060 18.795 16.790 12.530
Newspaper 8.330 6.248 5.581 4.165
Educational Services 4.760 3.570 3.189 2.380
Industrial Services 20.230 15.173 13.554 10.115
Automotive 8.290 6.218 5.554 4.145
R.E.I.T. 10.460 7.845 7.008 5.230
Insurance (Life) 7.330 5.498 4.911 3.665
Pipeline MLPs 15.630 11.723 10.472 7.815
IT Services 20.350 15.263 13.635 10.175
Chemical (Specialty) 11.380 8.535 7.625 5.690
Funeral Services 11.670 8.753 7.819 5.835
Internet 35.070 26.303 23.497 17.535
Information Services 22.140 16.605 14.834 11.070
Natural Gas (Div.) 14.550 10.913 9.749 7.275
Medical Services 12.410 9.308 8.315 6.205
Securities Brokerage 6.020 4.515 4.033 3.010
Machinery 12.120 9.090 8.120 6.060
Restaurant 9.34 7.01 6.26 4.67

Disclaimer: Businesses must work with a business professional such as a business broker or chartered accountant (CA) to get a formal value for their business. The techniques described here can be used for informal internal valuations.