Alliance Business Valuations - How to Value A Business

How to Value a Business

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Introduction

This presentation outlines four common approaches used to estimate the value of a business

Multiple of EBITDA Method

Revenue Multiples Method

Owner Benefit Method

Present Value of Future Earnings (Discounted Cash Flow) Method


Multiple of EBITDA Approach

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a commonly used indicator of business profitability

EBITDA can enable comparison of profitability across companies by eliminating factors that are specific to a particular company such as level of debt, tax structure, owned vs. leased assets, and similar

EBITDA can be used to estimate the value of a business by considering a known value of comparable companies as a multiple of their EBITDA


Multiple of EBITDA Example

An example to illustrate this approach

An appraiser valuing company A finds a similar company (company B in this example) that is publically traded so it’s stock price is known

The appraiser can use the known stock price of company B to calculate how B’s stock price relates to B’s EBITDA – in other words the appraiser can understand the value of B as a multiple of B’s EBITDA

Then, the appraiser can use that same multiple to estimate the value of company A based on A’s EBITDA.

Numerically, the process for estimating a value of company A can be shown as follows:


Multiple of EBITDA Example (cont.)

Step 1: Finding the EBITDA multiple of company B

Known value of company B: $1,000

Known EBITDA of company B: $ 200

From this, it is calculated that B is worth 5 times its EBITDA

Step 2: Applying B’s EBITDA multiple to estimate A’s value

Known EBITDA of company A: $ 175

Calculated comparable EBITDA multiple: 5

From this, it is calculated that the value of A is 5 x $175 = $875

This simplified example illustrates the use of a multiple of EBITDA business valuation approach, but it omits a variety of factors that need to be considered. For example are A and B really comparable?


Revenue Multiple Approach

Similarly to the multiple of EBITDA valuation method, this approach estimates the value of a business by considering a value of comparable companies as a multiple of revenue


Multiple of Owner Benefit Approach

This business valuation methodology estimates the value of a business by considering the value of all benefits that an owner is deriving from the business

Those benefits generally include the owner’s compensation, distributions, and discretionary expenses such as automobile expenses, owner’s personal expenses paid by the business, pension contributions and similar


Present Value Of Future Earnings (Discounted Cash flow) Approach

This business appraisal approach estimates the present value of a business by considering the projected value of the business’ cash flow at a discount rate

The basic premise is that it is possible to calculate a value of a business by estimating how it will perform in the future and calculating today’s value of that future performance

The process takes into account various aspects relating to the time value of money. For example one dollar today and one dollar five years from today are not valued the same


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Alliance Business Valuations - How to Value A Business