Business Valuation

Example Earnings

  • Net Income:
  • $175,000.00
  • Owner’s Salary
  • $50,000.00
  • Owner’s annual salary.
  • Depreciation
  • $2,000.00
  • Tax depreciation (non-cash)
  • Interest
  • $500.00
  • Credit Card
  • Automobile
  • $3,000.00
  • Owner’s personal vehicle.
  • Health Insurance
  • $12,000.00
  • Owner’s Health Insurance
  • Seller’s Discretionary Earnings
  • $242,500.00
  • Adjusted with owner benefits added.

Acceptable Methods:

There are various acceptable methods used when valuing businesses, many factors contribute to the best method to use, including but not limited to: industry, size of the company, revenue and EBITA rates, circumstances of sale asset value and management style.

Asset-Based Valuations: Although fairly straight forward, the asset valuation method is not commonly utilized for businesses with moderate to high earning potential. The asset valuation method values the business by evaluating the assets, both tangible and intangible and allocating price to the tangible and intangible assets. The asset valuation method, can contribute to undervaluing of business and is most utilizable by liquidating businesses or those business with little intangible asset worth.

Arguably the most common method of business valuation, the Earnings Multiplier Method works to project the future earnings potential of a business and thus articulate a forecasted return on investment (ROI) to the purchaser.

Earnings Multiplier Methods: Arguably the most common method of business valuation, the Earnings Multiplier Method works to project the future earnings potential of a business and thus articulate a forecasted return on investment (ROI) to the purchaser. The multiplier can range significantly between businesses depending on a variety of factors, ranging from 1, 2, 3, 4 to 10 times a business’s Earnings Before Interest, Tax and Depreciation, commonly referred to as EBITA. Often times, the seller will work with a consultant to obtain their EBITA, sometimes referred to as Seller’s Discretionary Earnings (SDE). This figure is calculated as Net Profit, plus or minus direct owner expenses or contributions or discretionary expenses/income. See the example on the right.

The purchaser will be privy to the calculation utilized to derive at the SDE. There is sometimes disagreement among the buyer and seller on figures used to calculate the SDE, this is often the most common difficulty to work through, utilizing this method. Sellers and Buyers are urged to use their Tax Firm Sales consultant to work through these calculations and come to terms on the SDE used.

Utilizing multipliers also assists with the use of comparatives, or business comps. Most often, the representing consultant will utilize similar business sales to assist in assigning a multiplier, depending on actual sales in the current market. Consultants rely heavily on market research to properly adjust the asking prices of business they represent.

Tax Firm Sales works with business owners on various methods of valuation. The factors that have been discussed above are those used to assist in valuation a business to go to marketplace. Upon discussing and evaluation with the owner, Tax Firm Sales is able to assign weights to different business factors to properly price and market a business to ensure the best price for the seller and the fairest price for the buyer.