Level of Industry Competition

The nature of competition in your industry will also greatly impact multiples. For example, if competition is highly fragmented, the potential for a rollup exists. A rollup occurs when an acquirer raises funds to consolidate your industry by completing multiple acquisitions and rolling them up into one large entity. Multiples can become temporarily inflated in an industry if a company is attempting a rollup amid limited acquisition opportunities. 

If your industry is highly consolidated and organic growth opportunities are difficult to achieve, multiples can also become inflated as acquirers fight over potential acquisition targets. If competition in your industry is strong, multiples can become depressed. That’s especially the case when it comes to dealing with buyers from outside of your industry, such as private equity groups. Private equity firms are reluctant to invest in any industry in which competition is intense and the business has a weak competitive advantage or value proposition. Similarly, if competition is fierce in your industry and your competitors have a strong competitive advantage, they’re unlikely to acquire your business and pay a high multiple unless they’re buying your customer base or some other aspect of your business that’s difficult to replicate.

When examining competition in your industry, here are some important criteria that can affect the multiple you receive:

  • Future Indirect Competition: What’s the threat of potential future indirect competition in your industry? Not only must you take into account the strength of the competition within your industry, but you also must consider the potential threat of competition outside your industry. Uber destroyed the taxi business. Airbnb is slowly encroaching on the hospitality industry. Netflix and YouTube are slowly killing off traditional media businesses. If a similar threat looms over your industry, it can weigh on the multiple you receive. 
  • Technology: How is technology affecting your company and its industry? If technology is likely to destabilize your industry, multiples will become depressed unless your business possesses some unique competitive advantage that’s difficult to replicate.
  • Competitive Advantage: Does your business have a sustainable competitive advantage? If your business has a stronger-than-average competitive advantage that’s difficult to replicate, it will become an attractive acquisition opportunity to both industry and financial buyers. For example, IKEA’s competitive advantage is difficult for competitors to imitate, so it’s likely to be viewed as a much more attractive acquisition opportunity than other companies in its industry.
  • Barriers to Entry: Do barriers to entry enhance the value of companies in your industry? Any factors that limit the ability of outsiders to compete in your industry have the ability to drive up multiples – regulations that restrict new entrants, for instance. The same goes for any potential protections from excessive competition within your industry or niche.
  • Brand Awareness: Is your brand name well respected in your industry? Brand awareness is a strong competitive advantage for consumer brands. Businesses with a well-known brand that have a loyal gang of customers sell at higher multiples than those that do not. Companies with strong brands such as Apple, McDonald’s, Coca-Cola, Visa, and Starbucks will always be valued at higher multiples than competitors whose brands are less widely known.
  • Online Presence: For mid-sized companies, the extent to which your business has a highly visible and functional online presence and favorable reviews can significantly affect its value. Businesses with a poor online reputation will always be difficult to sell and will therefore change hands at a significantly depressed price, regardless of other factors.