A common phrase in respect of business value is a “Multiple of Adjusted EBITDA”
Earnings Before Interest, Tax, Depreciation & Amortisation is a widely used profit related valuation method.
This effectively strips the profit back to a position that isn’t arbitrarily affected by asset depreciation or the burden of debt.
This then needs to be “adjusted” which should include any “add-backs” as part of the “normalising adjustments” which will typically take into account of items such as:
So we are essentially getting to what a business will generate in order to service future debt.
A multiple is then applied to the “Adjusted EBITDA” figure, which will determine the Valuation for the business. The EBITDA multiple in the valuation process is often based on an industry based average, calculated on a sample of transactional values and multiples of similar sized businesses sold. The multiplier figure for SME company valuations, is usually between 3 and 5.
Sometimes this can be higher if there are strategic reasons, or the business is in a specialist sector.
Whereabouts in this scale will depend on risk factors which will affect different businesses
When it comes to business value, “the lower the risk, the higher the value” and therefore, the following subjective aspects need to be taken into account:
It has always amused me that care is taken to accurately compute profit and adjusted ebitda, only to multiply by an arbitrary number.
But as I was told early on in my accountancy career – “Accountancy is an art and not a science”
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