What methods are used to value a business?

 

Common methods of valuing a business include:

​

• 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.

​

What method should be used?

​

• 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?

​

Typically multiples of non-listed, middle market and SME businesses range from one up to ten times. The average multiple for smaller SMEs is 3-5x Adjusted EBITDA.

 

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, contracted customer relationships.

A few examples of 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. Working with a broker will allow you to identify both selling points and weaknesses to be addressed.