Small business valuation multiples explained.

In trying to value a small business, are you confused about which earnings valuation multiple to use?  There are at least six earnings computations, including:

• SDE – Seller’s Discretionary Earnings
• EBIT – Earnings Before Interest and Taxes
• EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortiztion
• Adjusted EBITDA – Normalized for other expenses
• DCF – Discounted Cash Flow
• Net Profit – What you show Uncle Sam on your tax return.

A widely used valuation methodology for privately-held businesses is applying a valuation multiple to a company’s earnings.  But which earnings number should you use?  For a particular business, the use of the wrong earnings metric could result in a wildly inaccurate valuation. 

In addition to selecting the right earnings computation, there is also often some difficulty in choosing the proper valuation multiple to apply to earnings for a particular type and size of business.

In an excellent article, my fellow business intermediary, Barbara Taylor, co-founder of Alan Taylor & Company, clears up the confusion.

You can read Barbara’s article here: Small Business Valuation Multiples Explained.

If I can assist with any of your business valuation or ownership transfer issues, please don’t hesitate to contact me at Will@WilliamBruce.org or by phone at the numbers listed below.

For further reading, here are additional related articles:

• How to Use Valuation Guidelines to Estimate the Value of a Business
• What are the “Discretionary Earnings” of a Business?
• How to Analyze a Business You’re Considering Buying
• How to Make a Written CONTINGENT Offer to Buy a Business
• Seven Negotiating Rules When Buying or Selling a Business
• How to Conduct Due Diligence When Buying a Business

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William Bruce is an Accredited Business Intermediary (ABI) and Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.   With offices in Fairhope, Alabama and Baton Rouge, Louisiana, he may be reached at (251) 990-5934 (Fairhope), 225-465-5799 (Baton Rouge) or by email at Will@WilliamBruce.org.