Banking & Lending Business Valuation Benchmarks

Business owners, prospective buyers, and industry investors rely on a diverse set of financial benchmarks to assess the value of a business. We have compiled data from current BizBuySell listings and sold businesses to provide insight into the business for sale market and important benchmarks for pricing and evaluating lending businesses relative to industry standards.

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Highlights of Banking & Loan Businesses Sold on BizBuySell

Banking and loan businesses sold on BizBuySell are primarily individually owned and franchise businesses that offer specialized loans for situations where traditional banks may not have a product. Common types of lending businesses include niche mortgage lenders, hard money lending, factoring and commission advance businesses, auto loan companies, business funding companies, and related lending firms.

Banking & Loan Business Sale & Asking Prices

Sale prices of lending businesses typically range from $1-2MM, though occasionally larger businesses of $3MM and up are traded. Sale-to-asking price ratios are generally above average, indicating consistent valuation between buyers and sellers.

Banking & Loan Business Valuation Multiples

Valuation, or pricing, multiples are financial tools that allow for comparisons between businesses that have different levels of sales and financial performance. They represent the sales price of a business relative to its revenue or earnings, and given enough individual business sales data, they represent what the market is willing to pay for a business given its revenue and earnings.

Valuation Ranges

Business values and associated multiples are influenced by a variety of macroeconomic factors such as interest rates, inflation, consumer spending, and overall economic growth. However, among businesses in a particular industry, size often matters most, with larger businesses fetching higher valuation multiples. Valuation multiples of lending businesses are fairly tight, and generally fall between 2- and 3-times owner's earnings.

Revenue & Earnings Multiples

Earnings multiples represent the value of a business relative to its owner’s discretionary earnings or "cash flow". Arguably the most important valuation tool - as seller's discretionary earnings will often dictate how much a buyer is able to borrow to finance the business acquisition - business valuations tend to hinge on a reasonable earnings multiple.

Revenue multiples represent the value of a business relative to its overall sales or revenue. In conjunction with an earnings analysis, revenue multiples are often used as a secondary calculation to validate a valuation.

How to Interpret These Multiples

We calculate and provide valuation multiples from our database of "comparable" businesses sold on BizBuySell. Multiples based on comparable businesses - "comps" in business broker parlance - are useful for valuing businesses for sale. They represent the values at which similar businesses sold, and provide a way to calculate prices based on market values. Business brokers and valuation professionals will always turn to local comps when pricing businesses for sale or evaluating businesses for acquisition.

Quartiles, Median, and Average

No two businesses are identical, and as such, valuation multiples exist in a range. We have carved out four common values within this range: Bottom 25% is the lower quartile, and represents the value under which the lowest 25% of valuation multiples fell. Top 25% is the upper quartile, and represents the value above which the highest 25% of multiples fell. Median is the middle of the range, and average is the mean of the set. Mean is almost always higher than the median, because a small number of high value businesses sold at multiples above the upper quartile will skew the average up.

Businesses with consistent financial performance, above average revenue and earnings, demonstrable growth potential, low owner involvement, unique competitive advantages, and a seller willing to finance will command a multiple at or above the upper quartile. Lower volume businesses with thin profit margins, full-time owner involvement, and many direct competitors will trade at or below the lower quartile. Most businesses will fall somewhere in the middle.

Based on this data, half of lending businesses are valued and sold between 1.99- and 2.3-times their annual seller discretionary earnings, with 25% of well-run, larger companies trading above this range, and 25% of smaller, less desirable businesses trading below. A minority of larger lending businesses traded well over 4-times earnings, bringing the average up above the top quartile.

Financial Benchmarks

To determine how a business compares in terms of sales volume and financial performance relative to industry peers, it’s necessary to have some insight into industry standards. "Benchmarking" describes the practice of comparing a business's financial performance to typical industry standards to determine where a business falls relative to other businesses in the same industry. These benchmarks can help guide business owners and buyers towards appropriate valuation multiples from the range above.

To that end, we have aggregated financial ranges of lending business sold on BizBuySell that can be useful for comparing a given business to the market.

Discretionary earnings (used interchangeably with the terms "cash flow" and seller's discretionary earnings or SDE) is often the crux of business valuations, so it is important to benchmark it relative to other similar businesses traded on the business for sale market. Revenue volume plays a large role in business valuation, as it measures the size of the potential income opportunity for new ownership. It's not uncommon for buyers to select an earnings multiple range based on overall revenue volume.

The table and chart below include revenue and earnings ranges of lending businesses sold over the past five years.

How Revenue and Earnings Level Affects Business Values

Obviously, higher levels of earnings lead to higher valuations, even given the same multiple. However, valuation multiples also tend to rise with business sales volume. Lending companies that consistently generate higher sales (and maintain benchmark profit margins) tend to sell for earnings multiples on the higher end. So, a factoring business generating over $3MM in revenue may sell for an earnings multiple approaching 3, while a sub-prime auto lending business with revenues below $1MM may trade closer to 2-times its owner's discretionary earnings.

This tendency for higher sales volumes to fetch higher valuation multiples is largely driven by the economics of business acquisition financing. Businesses with greater revenue and earnings give buyers more cushion to cover debt service obligations and still have enough left over to pay the new owner a reasonable income.

Financial Services Sector Comparisons

For a more complete understanding of the market and valuation standards, consider comparisons within the broader financial services category when benchmarking lending businesses. The chart and table below include key metrics from sales of select financial services businesses on BizBuySell.

Compared to others in the financial services sector, lending businesses are discounted relative to their financial performance. The business model is inherently risky, as they often operate in areas traditional bank find too small to serve, or too risky. This added risk likely brings down business values.

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