Page 17 - MIND YOUR ASSET

MIND YOUR ASSET

Disagreements can occur regarding calculation of cash flow and estimated sales projections. Many
cash flow and EBITA (earnings before interest, taxes and amortization) projections use “altering”
numbers to reflect the effect on profits of perks that a business owner takes from the business.

Factors that affect the multiplier
Generally, a profitable, reasonably healthy, small business will sell in the 2.0 to 6.0 times EBIT
range, with most of those in the 4.5 range. So, if annual cash flow is R1,000,000, the selling price
will likely be between R2,500,000 and R4,500,000. But there are many factors that affect the
multiplier.

Examples of Positive factors (that raise multipliers) include:

 Diversified customer base – no one customer is more than 10% of sales
 Proprietary products, with strong brand and/or patent or trademark

 Strong management team with few key personnel
 Weak competitors and a healthy market share for your company
 Products that are early in the Product Life Cycle
 Diversified products – no one product is more than 15% of sales
 Ability of the company to meet some growth with current plant and equipment
 No pending legal or government action
 Financial ratios that are near or above industry averages

Examples of Negative factors (that lower multipliers) include:

 No unique products, they are all just like the competitors’
 One or a few customers make up more than 25-30% of sales
 Strong competitors and a weak or declining market share for your company
 Products that are near the end of the Product Life Cycle
 One product makes up more than 20% of sales
 Major investment needed soon for new plant and equipment
 Pending legal or government action
 Financial ratios that are below industry averages

There is no perfect business, but buyers will use these factors to negotiate the price down. It is
important to work up a plan to convince buyers that the negatives can be overcome.

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