***Advertisement: Ascent Partners 1 September 2010***

Got a question about buying or selling a business? Here's your chance to ask an expert. Richard Rasmussen of Ascent Partners answers everything you need to know and this week sheds some light on the term "multiple". FAQ 2: In valuing a business, what does “the multiple” mean? Answer: The multiple refers to a number that is multiplied by the earnings of a business to derive the value of the business. One of the most common methods to value a printing business is a “multiple of earnings”. The “earnings” part is usually derived by the “Earnings Before Interest, Tax, Depreciation and Amortisation” or EBITDA. This EBITDA figure is normalised to allow for abnormal or once off expenses, and also for expenses of a personal nature.

For example, your EBITDA may show in your accounts as $100,000. But in this period you have had a “once off” factory move costing $50,000, and you’re spouse is working as a bookkeeper 2 days a week and your paying her $60,000 per annum (say the market rate was $15,000 for this type of work). So you would “add back” the $50,000 and the difference between $60,000 and $15,000 to arrive at a normalised EBITDA of $195,000. This is the “earnings” figure you would use.

Sometimes micro businesses use “PEBITDA” as their earnings measure. The “P” stands for personal, so it is the earnings before they draw a wage or, put another way, the earnings available to the owner. This compares to EBITDA which is derived after a market wage is determined for the owner. Once the “earnings” are calculated, you then need to know what number (or multiple) to multiple this figure by, to get the business value. There is no doubt that over the past 2 years these “multiples” have reduced. Part of the reason for this is that there is more risk involved in the purchase of a business in uncertain times, and partly because the market for print has changed. Generally speaking the smaller the business, the smaller the “multiple”. The major reason for this is because there is more risk in buying a small business. For example the proprietor of a printing business that turns over say $1,000,000 is likely to be a major part of the business. All the clients deal with him, so the risk is once you take him out, how many customers will remain? Larger firms attract higher multiples. Again the reason for this is largely a function of risk. Larger firms by nature will have a management structure in place, so if you remove the owner, not much changes, the clients still deal with their sales person, the infrastructure remains, and it’s business as usual. Apart from risk, other items that affect multiple are the market the business operates in (eg a private hardware store’s multiple would have been severely reduced in the past five years by the advent of Bunnings), the clients and the growth potential of those clients, the spread and mix of clients, the systems that are in place, the market value of the equipment, the technology of the equipment and the intellectual property of the company. So, back to the example, we have said the normalised EBITDA is $195,000. What multiple do we choose? Well, if the business turned over $2,000,000 and was a general commercial printer, with nothing all that special about it, then the multiple may be between two and three. So, from that, a business value is derived of between $390,000 and $585,000 plus stock at valuation. This would be on the basis that all equipment, except the rented equipment (where the rental would be transferred to the new owner), would be passed on unencumbered. At the time of transaction the norm would be that vendor pay out the staff, and he collects the existing debtors and pays out the creditors. Many printers are surprised at the result this valuation technique derives, because in many instances the appraised value is less that the market value of the plant and equipment, or worse still that the net result after paying out loans on plant and equipment, and staff is in fact negative. Where the market value of the plant and equipment exceeds the “multiple of earnings” value of the business, then another valuation technique needs to be applied. Effectively the business is worth the equipment value plus a goodwill value. I’ll discuss that technique next week. To ask Richard a business-related question, contact mitchell@print21.com.au Ascent Partners’ services include the appraisal of printing business. For further information, please contact Richard Rasmussen on 0402 021 101.