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How to value a business - Company Valuation Methods

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What methods are used to value a business?

 

Common methods of valuing a business include:

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• A multiple of EBITDA

• A multiple of the business annual turnover

• A multiple of the net profits

• A valuation based on the balance sheet

• Discounted cash flow

 

The important thing to note is that the above methods give only a general indication of value. A professional business sale advisor will be able to give you a much better understanding of what methods and multiples should be used to accurately value a business for sale.

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What method should be used?

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• Profit is the single most important factor of business valuation as such most business brokers use a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to provide an indication of value.

 

What Multiple should you apply to a business valuation?

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Typically multiples of non-listed, middle market or SME businesses range from one up to ten times.

 

There are many aspects of a company that will positively affect valuation including e.g. Historic and future forecasted growth, a strong position in a niche market place, profit to turnover ratio and strong customer retention. Factors that can negatively affect business valuation include over reliance on a single or small group of customers or suppliers, risks to the supply chain, a weak management team and high staff turnover to name just a few.