The following is excerpted directly from the BizPricer™ Manual
Multiplier Calculation
The next step is to determine the Multiplier to be used in the valuation calculation, but first a little background information. The Multiplier can also be thought of as the inverse (divided into one) of the Capitalization Rate (CAP Rate) or the Return on Investment (ROI). CAP Rates and ROI’s are usually expressed as percentages and can also be expressed as decimals. For example:
A CAP Rate or ROI of 25% can mathematically be expressed as 0.25
Converting a CAP rate or a ROI to a multiplier is simply the process of dividing that number into 1.0. For example:
A CAP Rate/ROI of 25% converted to a multiplier = 1.0/25% = 1.0/0.25 = 4
Conversely, if you know the multiplier you can convert it to an equivalent CAP Rate or ROI by dividing the multiplier into 1.0. For example:
A Multiplier of 4 converted to a CAP Rate or ROI = 1.0/4.0 = .25
A specific capitalization rate/multiplier for a particular business valuation can be determined using various methods such as investment alternative build-up methods, industry comparisons, or evaluating against established criteria that considers key business operational factors. The capitalization rate/multiplier calculation method used by BizPricer™ combines the pertinent elements of most published capitalization rate estimation processes.
But you really only need to know this as background information. BizPricer™ will automatically calculate a Multiplier to be used based on your assessment of the risk factors in the business being valued.
Here’s what to do:
1. Return to the BizPricer Excel™ spreadsheet in the software provided, BizPricer.xls, and open the second worksheet titled: Multiplier Calculator.
2. Consider each of the 15 Risk Factors in turn. These Risk Factors are:
Continuation of Earnings Assessment
Business History Assessment
Business Growth Projection
Competition Analysis
Business Expansion Opportunities
Barriers to Entry for New Competition
Customer Base Sensitivity
Management/Key-Employee Retention Projection
Business Location Continuation
Operational Facility/Equipment Suitability
Business Purchase Financing Availability
Industry Strength Assessment
Environmental Risk Assessment
New Owner Social Desirability
Alternative Investment Returns
3. Each risk factor contains a high, low, and mid-point range of possible values. Note that examples are provided for you for each Risk Factor at the high, low and mid-points. Select any of the values provided or any number in between which is most appropriate to describe this business risk factor (you can also score partial points if you think it’s appropriate, e.g. 2.5).
4. Assign a single number in the “assessed score” column for each risk factor (in place of the starting zero).
Note: In selecting the assessed score it’s very important to be as realistic as possible about each of the factors. Most profitable businesses with a good history and positive outlook will score a calculated multiplier in the 2.0 to 4.0 range using these risk factors.
Here are some typical multiplier ranges determined from actual business sales:
Auto Dealer – New Cars 2.0 – 4.0
Auto Repair 1.0 – 2.5
Beauty Salons 1.0 – 1.5
Book Stores 1.0 – 2.0
Coffee Shops 2.0 – 2.5
Construction 3.0 – 5.0
Distributors 1.5 – 2.0
Franchised Food 1.5 – 2.5
Gas Stations 2.0 – 3.0
Health Care 3.0 – 5.0
Information Technology 4.0 – 6.0
Manufacturing 3.0 – 5.0
Marinas 8.0 – 10.0
Motels 2.0 – 3.0
Pharmacy 3.0 – 7.0
Restaurants 2.0 – 4.0
