Business Valuations - Profit Multiples
One of the most common business valuation techniques is the Profit Multiple or Multiple of Profit. Simply put it is the Profit of a business multiplied by the 'Multiple'. However watch out for:
Which Profit level?
Profit multiples can be calculated at many different levels such as:
-
Pre Tax Profit
-
Earnings before Interest Tax Depreciation Amortisation (EBITDA)
-
Post Tax profit
-
Gross Profit
Click here for Profit definitions
.
When a multiple is quoted check which Profit level it is being applied to as this will normally have a big effect.
Sustainable Profit
Many buyers are seeking to determine the 'Sustainable Profit' which is the element of current Profit which is likely to recur in the future. In arriving at this figure it is normal to adjust the stated Profit,
removing any unusual items of income
or expenditure to identify the sustainable or maintainable Profit.
Historic or Future?
Multiples can be applied to either the historic sustainable profit or the forecast future sustainable profit.
Buyers
of businesses will almost always seek to purchase based on a
historic
profit multiple, however the FD of the Buyer will also have to justify the valuation being paid by reference to the forecasted future performance, as the FD will be putting the investment case to the Board or Shareholders or Funders.
Business Sellers
will seek to apply the multiple to
future
profits. The sellers case will be strengthened if the business owner can point to a good track record in forecasting future profit and regularly achieving these forecasts.
Which Multiple to use?
Buyers typically seek to apply lower multiples whereas Sellers favour higher multiples. Our Virtual Finance Directors often are asked to review the multiples of deals done to provide objective advice.
Do you want a Business Valuation on your business?
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.
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