Comparing Apples to Oranges: Industry-Specific Insights for Accurate Business Valuation

In the world of small business, every business is unique because every small business owner is unique. As a result, making the assumption that businesses operating within the same industry are going to be valued the same is an improper one. 

When looking at the various industry sectors (construction, manufacturing, distribution, etc.,), the financial structure changes. Some industries depend on heavy machinery, some depend on significant working capital, and some depend solely on labor, and with these unique aspects of their model, comparing one business from one industry to a business from a different industry is rarely ever done. For example, the average cash flow margin from the manufacturing industry is far lower than the average cash flow from the insurance industry. It’s an apples-to-oranges comparison.

While every business operating from within the same industry may operate slightly differently, the operating and financial models of those businesses are usually very similar. Because of this, when valuing a business, it’s always best to start your comparison of like businesses from within the same industry. 

Understanding Industry Dynamics

As mentioned earlier every industry has unique aspects that separate it from other industries, many of which are within the financial model. Still, they also exist in the operational model as well. Machine shops for example will almost always have a significant concentration in one or more customers. In other industries, that’s a serious risk that reduces value, but in the machine shop industry, it’s common so the risk is less.  

A key component of a business valuation will include the study of industry and market trends, government regulation, and the competitive landscape of that industry.  This helps to determine how the subject company (being appraised) is performing overall compared to the industry as a whole and helps to uncover weaknesses or identify strengths. For example, an industry study may show that competition has increased significantly over the last 3 years but the subject company continues to grow. That’s favorable to value. The dental industry continues to show rapid technological advancement, which should increase efficiency and make the customer experience more enjoyable. This should lead to revenue increases and margin increases, but if the subject dental practice is not showing those signs, that’s unfavorable to value. 

This is why paying close attention to the industry studies is important. Reading closely and carefully may uncover areas that impact the value conclusion of a business. 

Industry-Specific Valuation Metrics

When valuing a business, many important factors are being considered during the industry analysis. The specific metrics being paid close attention to will fall into the categories of industry growth and outlook, consumer demand, and pricing. These are metrics that have the most impact on value. Think revenue growth (demand), sustainability (outlook), and cash flow strength (pricing).  We know for example that any business operating within the healthcare or technology space should be in a position to show steady growth that’s in line with the industry. Because those industries have a strong industry outlook, the sustainability of historical growth can be assumed. If these metrics are not present in the subject company, value is impacted. Full and limited-service restaurants (hospitality industry) are struggling right now. Labor challenges (economic metrics) are creating pressure on cash flow margins and revenue sustainability. Businesses showing the opposite trends can see added marketability and value. 

Market Trends and Cash Flow Multiples

Economic and industry trends can influence value. Favorable or unfavorable to the value of a business, that influence will not generate price-to-earnings multiples outside of normal market demand. Regarding the value of a privately held company, the 2 key metrics that drive value are cash flow and risk. Small business comes with an inherent amount of risk compared to their publicly traded counterparts. So regardless of how well a subject company performs compared to the industry, the added value will eventually cap out. If your valuation exceeds 3.5 x SDE (Seller’s Discretionary Cash Flow) or 5 x EBITDA, the value may be too high.

Technology and Innovation in Business Valuation

• Explore the role of technology and innovation in shaping industry dynamics and business valuation.

• Discuss how disruptive technologies, digital transformation, and innovation trends influence valuation methodologies and growth projections.

• Provide examples of industries undergoing technological disruption and their implications for business valuation.

There are many aspects of analysis that go into an accurate business valuation. Economic and Industry research is one of them.  While this part of the analysis is not the driving factor of the value conclusion, it will offer very specific metrics, which when compared to the subject company being appraised, will allow the appraiser to be more precise in the conclusion of value. Not only that but this kind of information is so helpful for the business owner for future exit planning. Knowing what to pay attention to adds to the ability to maximize value when the time comes to place their business up for sale. 

Keep Learning About Business Valuations

How to Navigate The Business Valuation Process Successfully

The Great Debate: Business Valuation With or Without Inventory

What Is Business Valuation? Why & When You Need One

Our Accreditations

Your GCF Business Valuation appraisal team has one or more of the following business valuation accreditations:

• Accredited Senior Appraiser (ASA) – is recognized as having achieved the highest level of education, training, and report writing for business valuations. The ASA designation is the gold standard for a business valuation professional. (source: American Society of Appraisers)

• Certified Business Appraiser (CBA) – a very prestigious credential in the eyes of all who are familiar with it as it earned the reputation of being a difficult credential to obtain. (source: National Association of Certified Valuators and Analysts®)

• Certified Valuation Analyst (CVA)
• Accredited in Business Valuation by the American Institute of CPAs (ABV by AICPA) – a credential granted exclusively by the AICPA to qualified valuation professionals who demonstrate expertise in valuation through knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)

• Accredited in Business Valuation (ABV) – credential is granted exclusively by the AICPA to CPAs and qualified valuation professionals who demonstrate considerable expertise in valuation through their knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)
• Certified Public Accountant (CPA)

Over 25 years of experience and expertise in business valuations and appraisals.  An accredited appraiser receives extensive training, remains in good standing, and follows specific industry practices to determine the value of a business.

GCF’s Machinery and Equipment Appraisal Accreditations

• Expert Equipment Certified Appraiser (EECA) – Our appraisers are recognized with a deep understanding of valuation principles and extensive experience by the Institute of Equipment Valuation.

• Certified Machinery and Equipment Appraiser (CMEA) – a CMEA professional has the expertise and certification to conduct a third-party machinery and equipment appraisal.