Multiples of earning business valuation method

Multiples of earning business valuation method

The Valuation of a business is the process of determining the current worth of a business using objective measures and evaluating all aspects of the business

Multiple is a way to measure one element of the financial status of a company by comparing two metrices ie price/earning ratio

Earnings are calculated as EBITDA (earnings before interest, taxes, depreciation & amortization) 

Multiple of earning of a year or average of years in order to come with a figure representing the company’s worth in a sale

Current profit multiplication depends upon stability of business, rationally in reality most businesses are sold for a multiple of 3 to 5 times the current profit

Pre-tax & Post-tax earning

Buyers tax rate to be considered and not sellers tax rate 

Past profit & projected future earnings

Profit from last 3 years to establish mire creditability in the Sale 

Current earnings an anomaly or are the consistent

Review of business history is necessary

Business climate

1) establishment

2) can run without current staff or team? 

3) competitors movement

4) economy is growing or sinking? 

5) impact of new technologies

Destroyers that can impact company value

1) you are not your business

2) no recurring, consistent revenue

3) a highly concentrated customer base

4) dependence on key employees without non-compete agreements

5) non maintaining good records

6) not understanding financial ratios and relative performance

7) sometime its ok to pay taxes

8) not understanding and outside investors viewpoint

9) not optimizing the use of capital

10) not understanding economic & business cycles

Complied By:-

Avinash Kulkarni 

Chartered Engineer, Govt Approved Valuer, Regd. Valuer

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