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A non-partisan, member driven organization that promotes the success of small business through political advocacy, networking, support services and educational programs.
20 S. Clark, Suite 500
Chicago, IL 60603
Office: (312) 548-8608
Fax: (312) 372-7076
Valuing a business is complex. Experienced practitioners have
written novels on the subject, but we don’t have time for that here.
Instead, this represents a high level crash course in business valuation
using the “EBITDA multiple” method, which is the most common valuation methodology used by private equity firms, strategic buyers, etc.
Q: How are businesses similar to homes and baseball cards?
A: They are all worth what the highest bidder is willing to pay for
them, no more – no less, regardless of what any book says. As a result,
businesses are typically valued based on sale prices of comparable
companies (“comps”). Just as homes in your neighborhood of similar size
represent a “comp” for your home, a business comp is roughly defined as
another company in your industry, of similar size and similar cash
Valuation Step 1: Calculate EBITDA:
The most basic reason companies have value is because they generate
cash; they are an investment that returns cash. The starting block of
every company valuation is calculating its cash flow, or “EBITDA”.
EBITDA is a quick & dirty estimate of the company’s free cash flow;
the pool of cash generated by the company’s normal operations, available
to make investments and service debt after all other operating expenses
have been paid.
Submitted by Anonymous on Thu, 10/20/2011 - 10:08pm