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
