In the confusing area of small business valuations, 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 an industry specific 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.
The two most commonly used multiples for the majority of small to medium size privately-held businesses are Sellers Discretionary Earnings (SDE) for the smaller businesses, and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the larger businesses where Private Equity Groups are among the buyers.
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.
Our firm performs written, fully documented valuations of small to medium size businesses. If we 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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