Why Larger Companies Get Larger Multiples

Selling your business requires a thorough valuation –a process that usually involves a detailed analysis of your financial reporting: all of your assets and liabilities, your contracts (suppliers, customers, employees, etc), and your stock and equipment, amongst other things. This analysis is then typically subjected to a valuation multiple –a way of getting a standardized look at a company in comparison to others of a similar nature. That standardized look is meant to level the playing field, but the fact is that larger companies typically get larger multiples. Here’s why...

Income and profit

To put it simply, larger companies tend to generate higher income levels –that’s part of what makes them large. Profit can also be larger due to the fact that a bigger company is typically better positioned to leverage the economies of scale available when buying in high quantities from suppliers, as well as being more powerful when it comes to the negotiating table for equipment and other key assets. This buying power is hard for a smaller company to harness unless they have very close relationships with their suppliers (which may not always transfer with ownership). These areas not only give a larger company better financials but also a better outlook moving forward –a key part of what makes the company attractive to buyers.

Customer base

The depth and breadth of the customer base are also important indicators of a company’s intrinsic value. A small company that loses one regular customer can feel that loss reverberating throughout the organization –a larger company with multiple sites and much greater market penetration will hardly notice the loss at all. How does this affect the business valuation? The bigger company runs a much lower risk of an impactful loss of profits, making them a more viable investment.

Expansion and growth

When it comes to the person or company that is buying your business, they are doing so because they feel that the investment will pay them back. One of the fastest ways that they can achieve a good return is by growing and/or expanding the business. Small companies and larger companies alike are able to grow, of course, but the smaller the business, the more they will struggle to adapt to growth –larger companies are usually better positioned to accept corporate change and have the various departments and personnel available to manage and sustain substantial growth or expansion without succumbing to the types of bottlenecks that might stymie a smaller company.

Pinnacle Pharmacy Group

Pinnacle Pharmacy Group has many years of experience in mergers and acquisitions activity, operating specifically in the pharmacy business and digital health sectors. We know the intricacies of the market, the regulations, and guidelines, and what buyers are looking for –so we can help you to get the most value when you sell your business.