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The Compounding Effect of Size on Business Value

A Study into the Impact of the Size of Businesses on Earnings Multiples

It is generally accepted in the marketplace that larger companies are generally less risky than smaller ones. This is because of various factors that differ between large and small companies, which may include a lower level of dependency upon key individuals within larger businesses, their more diversified customer bases, and an overall reduced vulnerability to idiosyncratic shocks. It is also understood, by the market as a whole and among business valuation / corporate finance professionals, that these relative levels of risk are reflected in the profit multiples that can be achieved on a sale of a business.

But how significant are these factors when selling a business, and in particular, how will the value that can be generated when selling an SME (expressed as a multiple of profits) differ from the profit multiples that are seen among the headline-grabbing acquisitions of large, ‘household name’ companies?

To assess this, Menzies has conducted a study into acquisitions of UK companies over a ten-year period between January 2005 and January 2015, using information that has been made publicly available.

In this research, we have subdivided the available population of acquisitions into groups based upon their respective ‘enterprise values’ (that is, the value of the ongoing operations of the business that is implied by the purchase consideration, after adjusting for outstanding debt). The median averages of each of these groups’ observed enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation) multiples were then determined.
Read the full study into the Impact of the Size of Businesses on Earnings Multiples.

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