How does business valuation differ by industry?

Two businesses with the same profit can be worth different amounts if they sit in different industries, because BDC says valuation multiples vary by industry. Business valuation by industry is not a separate science, but the industry changes the inputs: which method makes sense, what ratio is applied and what the valuator looks for first. This guide explains how that works in general terms, drawing on BDC and CBV Institute. It deliberately gives no multiples, because any figure quoted without a date, a business and a valuator behind it can mislead more than it helps.

Industry shapes which method fits

BDC says a valuator may use one or more methods depending on the available information and on the type of business and transaction. Earnings-based approaches are commonly used for established businesses generating reasonable returns whose value exceeds that of their assets alone. Asset-based approaches are typically used for businesses whose value is asset-related rather than operations-related, such as in the real estate sector. They are also applied when a business generates poor returns or is expected to be liquidated. So the sector can decide the starting point before any arithmetic begins.

Industry shapes the ratio

In BDC’s article on valuation methods, market-based methods apply a valuation multiple, and in its article on acquiring a business BDC says the multiples vary by industry. In its words on valuation methods, the specific figure used and the type of ratio vary depending on many factors, such as the industry and size of the company, market conditions and the multiples used to buy or sell comparable businesses. A ratio may be based on EBITDA, revenue or another metric. The same sentence tells you something else: size matters as well as industry, so a sector average does not describe your business without adjustment.

Why a rule of thumb is a starting point only

If someone in your trade quotes a sector multiple, treat it with care. BDC lists using a valuation method unsuited to the type of business, or to its level of returns or cash flow stability, and applying an inappropriate multiplier of EBITDA among the common valuation mistakes. A quoted multiple is a shortcut, and it may not fit your earnings quality, size or customer base. The related question of whether to set an asking price from industry rules of thumb is covered separately. Ask where a quoted figure came from, what it was applied to and when. A figure from a business of a different size, or from a different stage of the market, tells you little about yours, and nobody can verify it without the underlying sale records.

Size and stage count as well as sector

BDC says the most suitable combination of methods depends on the purpose of the valuation and on the company’s characteristics, such as its profitability, future outlook and asset mix. Two businesses in the same industry can differ on every one of those. A business with steady earnings and one with uncertain cash flow may call for different earnings approaches, and BDC notes that different approaches are used depending on whether earnings are expected to be stable in coming years. If a business depends heavily on its owner personally, ask the valuator how that affects the figure in your sector.

• Ask the valuator why the chosen method suits your type of business.
• Ask what comparable businesses the valuator used and how close they are to yours in size and character.
• Separate what the business earns from what depends on you personally.
• Check whether assets, such as real estate, carry more of the value than operations do.
• Treat any single multiple quoted for your sector as something to question.

What stays the same across industries

Some steps do not change with the sector. BDC lists failing to normalize earnings, using the book value of assets rather than fair market value, making unrealistic projections and ignoring changing sales trends as general mistakes. It also notes that even different valuators may not come up with the same figure. And the final price is influenced by other factors, such as the seller’s eagerness, the buyer’s strategic interests, available financing and the company’s ability to transition smoothly. Industry is one input among several, and a valuator weighs it alongside the quality of the earnings, the state of the assets and the terms of the transaction. Ask the valuator to show which of these drove the final figure, so you can see how much came from the sector and how much came from your business itself.

Finding someone who knows your sector

CBV Institute says Chartered Business Valuators are recognized by regulatory, judicial and tax authorities in Canada as experts in business valuation. The designation shows professional training in valuation. It does not tell you whether a valuator has worked in your sector, so ask; BDC says it is helpful to seek valuators who have experience with your industry. BDC also suggests asking your accountant, lawyer and network for valuators they have used. For a broader starting point, see what your business is worth.