Different Ways To Value A Business

One of the services we can help with is business valuation of a prospective purchase. A couple of the ways that you might value a business is a multiple of profit.

In the technology space, it becomes less about profit or revenue. It can become more about what’s the value of this asset, because quite often there won’t be. If we have a business that is making a loss or those sorts of things and when we’re in the acquihire so we were acquiring a business for the talent, we might go back to revenue rather than profit as well. Generally, 90% is a good indicator of the profit multiple versus revenue.

We’ve got multiple of profit and multiple of revenue, and then kind of whatever someone will pay. A lot of it has to do with what it’s worth to the buyer. It’s important that one of the first two options might start the conversation.

If we are looking at profit, there’s this thing called EBITDA, an acronym for earnings, also known as profit before interest, tax, depreciation and amortisation. Depreciation is the write off of your assets, let’s say cars or equipment that you own. Depreciation is claiming a portion of that each year. Interest is interest on any debt. Tax, if it’s a company, companies pay tax, trusts don’t if you’re acquiring from a trust. Also, you need to remove the owner’s benefits. If it’s a small business that the owner might be putting their car through or their mobile, which you don’t need to pay for if you acquire it. Any other benefits to them, need to be taken out or added back to the profit figure. 

You need to pay the owner, if the owner’s working full-time in the business, but if a lot of the clients are structured as trusts and usually we take the profit from the trust and distribute the profit. We don’t pay a salary before the profit, so we need to go and adjust that profit figure to pay a market rate salary and we need to hire someone to pay for that, to run that business. So you need to replace the current business owner and It could be a process in adjusting that profit figure.

Watch the full webinar, ’Aquire a business‘ at https://learning.benwalker.com/courses/acquiring-a-business