In trying to value a small business, are you confused about which earnings metric 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 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 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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