Valuation Multiples for an Engineering Firm
The engineering industry comprises companies that use engineering to assist businesses, governments, and individuals. Engineering services can include advisory and consulting, feasibility studies, planning, and designing, etc… There are over 139,000 engineering firms throughout the United States. In recent years, the engineering industry has generated over $360 billion dollars in revenue. For the next several years, IBIS World predicts that demand for engineering services will remain steady. This is ideal for those looking to buy or sell an engineering firm. Whether you are buying or selling, it is important to understand valuation multiples for an engineering firm. A business appraiser commonly uses these when valuing an engineering firm.
Valuing an Engineering Firm
If you are buying or selling an engineering firm, receiving a business valuation comes with many benefits. For buying an engineering firm, a business valuation can help you determine a fair purchase price. The business appraiser may also discuss negotiation strategies. For those looking to sell an engineering firm, a business valuation can help determine a listing price. Whether you are entering or exiting the engineering industry, receiving a business valuation can help you maximize the value of an engineering firm.
At Peak Business Valuation, appraisers often use various approaches to value an engineering firm. One method is the market approach which utilizes valuation multiples. In this article, we discuss valuation multiples for an engineering firm. However, the values we use in this article are only averages. For more specific information, receive a business valuation for an engineering firm. Peak Business Valuation is happy to provide you with a business valuation! We can help you understand which methods and multiples are applicable to your engineering firm. Start today by scheduling a free consultation with Peak Business Valuation, business appraiser.
Valuation Multiples for an Engineering Firm
The following image displays average valuation multiples for an engineering firm. Business appraisers at Peak often use the market approach to value an engineering firm. This approach relies on valuation multiples. Keep in mind, these values are only a guide. For more accurate information, receive a business valuation for an engineering firm. Peak Business Valuation is proficient in valuing engineering firms. We can provide you with a business appraisal and answer any questions you may have! Start now with a free consultation with Peak Business Valuation.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are ratios. For an engineering firm, valuation multiples compare the company’s value to a financial metric. These metrics include cash flow, earnings, or sales revenue. For example, a common valuation multiple is the SDE multiple. The SDE multiple compares the seller’s discretionary earnings of the engineering firm to the implied value of the company. To determine the fair market value of an engineering firm, the business appraiser analyzes the multiples of comparable engineering firms. Then, the expert determines appropriate multiples for your engineering firm and estimates a range of value.
For instance, suppose that an engineering firm has $500,000 in SDE. It receives a 2.51x SDE multiple. In this example, the firm would have an implied value of $1,255,000 ($500,000 times 2.51x). On the other hand, a 3.00x multiple indicates that the value of the company is $1,500,000 ($500,000 times 3.00x).
Below, we discuss SDE, EBITDA, and REV multiples for engineering firms. The following paragraphs give an overview of the average valuation multiples for an engineering firm. These valuation multiples are what engineering firms typically transact at. Since each engineering firm is different, it is important to note that the range of value may vary.
Peak Business Valuation, business appraiser, works with many individuals who are buying or selling an engineering firm. For more information about valuing an engineering firm, schedule a free consultation with Peak Business Valuation, business appraiser!
SDE Multiples for an Engineering Firm
Average SDE multiple range: 2.48x – 3.04x
According to Peak, engineering firms transact at an average SDE multiple of 2.48x – 3.04x. To derive an implied value of an engineering firm, take the seller’s discretionary earnings and apply the multiple. See the following equation.
SDE X Multiple = Value of the Business
For example, an engineering firm generates $890,000 in seller’s discretionary earnings. It transacts at a 2.75x multiple. In this case, the value of the engineering firm is about $2,447,500.
$890,000 X 2.75x = $2,447,500
At Peak, experts often use SDE multiples to value an engineering firm. To calculate SDE, the appraiser adds back any expenses the new owner may not incur to the engineering firm’s profit. These add-backs may include personal transactions, owner’s compensation, and non-recurring or non-related business expenditures. This helps the valuation expert to determine the potential cash flow of the engineering firm. This is crucial when determining the value of an engineering firm.
EBITDA Multiples for an Engineering Firm
Average EBITDA Multiple range: 3.18x – 3.82x
On average, engineering firms transact between an EBITDA multiple range of 3.18x – 3.82x. Apply this multiple to EBITDA to determine an implied value of the business. Refer to the equation below.
EBITDA X Multiple = Value of the Business
In this example, an engineering firm has an EBITDA of $720,000 and transacts at an EBITDA multiple of 3.48x. Using the above metrics, the engineering firm is worth approximately $2,505,600.
$720,000 X 3.48x = $2,505,600
A business appraiser uses the EBITDA multiple to determine a company’s return on investment (ROI). Many business appraisers prefer using the EBITDA multiple since it helps normalize differences. This allows them to compare your engineering firm to similar businesses. Normalized ratios provide a more accurate representation of the future earnings that a buyer can expect from an engineering firm.
REV Multiples for an Engineering Firm
Average REV Multiple range: 0.59x – 1.10x
According to our data, engineering firms sell at an average REV multiple of 0.59x – 1.10x. A valuation expert can determine the implied value of the business by multiplying the amount of sales revenue an engineering firm makes by the REV multiple. See the calculation below.
Revenue X Multiple = Value of the Business
For instance, an engineering firm makes $2,400,000 in revenue. It then transacts at a 0.94x multiple. In this case, the business is worth approximately $2,256,000.
$2,400,000 X 0.94x = $2,256,000
Revenue multiples are less common when valuing small businesses. When a valuation expert at Peak Business Valuation is valuing an engineering firm they will determine the appropriate methods and multiples to use.
Summary
Whether you are buying or selling an engineering firm, consider receiving a business valuation. As part of a business valuation, a business appraiser will help you understand valuation multiples for an engineering firm. In addition, they will identify the strengths and weaknesses of your engineering firm. With this information, you can take steps to maximize the value of an engineering firm.
Peak Business Valuation, business appraiser, works with engineering firms across the country. We are happy to help you in valuing an engineering firm! Start by scheduling a free consultation with Peak Business Valuation, business appraiser.
For more ideas see Valuing an Engineering Firm, Value Drivers for an Engineering Firm, and How to Value an Engineering Firm.
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